A positive development in the U.S./Canada trade talks boosted the Canadian dollar in late afternoon trading, yesterday. Reuters reported that Canada was willing to make concessions and give Americans improved access to the Canadian dairy industry.
The Canadian dairy industry has been in President Trump’s cross-hairs and has been since re-negotiations began toward a revamped North American Free Trade Agreement. In June, he was tweeting his outrage. He said "Fair Trade is now to be called Fool Trade if it is not Reciprocal. According to a Canada release, they make almost 100 Billion Dollars in Trade with U.S. (guess they were bragging and got caught!). Minimum is 17B. Tax Dairy from us at 270%. Then Justin acts hurt when called out!"
Prime Minister Trudeau was just as stubborn. At the beginning of August, he was professing his undying support for Canada’s supply management system and the dairy industry by default. He said "the U.S. administration is targeting supply management. They want us to eliminate supply management in Canada. I can tell you here today, as I have been saying for months if not years, we will protect supply management."
Apparently not: Trump has threatened Canada with 25% tariffs on cars imported into the U.S. if a new U.S./Canada trade deal isn’t achieved. Something had to give, and it looks like it was milk. Canada’s dairy industry contributes less than $1.0 billion to the Canadian economy in contrast with the domestic auto industry which provides a $19-billion contribution. It is more critical to Ontario. Auto exports account for 28.1% of all exports in Ontario.
The Canadian dollar is still vulnerable. Trump needs to be satisfied that the dairy concessions are enough to give American’s unfettered access to the Canadian market. Supply management was only one sticking point. The other major hurdle is the dispute resolution process. Canada is demanding the new agreement retain the existing third-party arbitration. The U.S. wants its courts to decide.
Foreign Minister Chrystia Freeland is in Saskatchewan today and will update the Liberal caucus on the trade negotiation progress. Traders will be looking for news from that meeting to provide Canadian dollar direction.
The global FX markets were marking time in overnight trading awaiting the monetary policy meetings from the European Central Bank and the Bank of England on Thursday. The ECB meeting is expected to be a non-event; ECB President Mario Draghi announced a few months ago that euro-zone interest rates would remain unchanged until next summer and that risks from global trade spats necessitate a cautious approach.
The BoE meeting is only slightly more interesting. Governor Mark Carney painted a bleak picture of Brexit risks previously, and traders will be alert to any updates on his view.
There is not much in the way of actionable economic data from Canada or the U.S. today, suggesting the Canadian dollar will consolidate within a $1.3040-$1.3080 range today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
