Another deadline is approaching for the North American Free Trade Agreement. U.S. officials have imposed a September 30/October 1 deadline because Congress needs 60 days to review the text and authorize President Trump to ink the deal. In addition, the U.S./Mexico agreement was struck while President Enrique Nieto was in power. He leaves on December 1.
Prime Minister Trudeau said that "informal NAFTA talks" would take place on the sidelines of the United Nations. Unfortunately, Trudeau’s request to meet with President Trump was rebuffed.
The Canadian dollar has performed admirably in the face of U.S./Canada trade risks and the prospect of a more-hawkish-than-expected Federal Open Market Committee (FOMC) statement and interest rate forecast, due tomorrow.
The Bank of Canada (BoC) is expected to raise domestic rates at its policy meeting on October 24, based on recent economic data. However, the lack of a trade deal may derail the bank's plans, especially if Trump follows through on his threat to slap 25% tariffs on imports of Canadian cars.
The FOMC is almost universally expected to raise interest rates by 0.25% to the 2.00-2.25% target range. That result is fully priced into markets and shouldn’t have any impact on the major G-10 currencies. The FOMC’s mandate is "maximum employment, stable prices, and moderate long-term interest rates." Arguably, they have achieved their objectives which suggests the phrase "The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2% inflation" will be removed, a modestly hawkish result. Also, the "dot-plot" forecasts include 2020 which will provide a bit of insight on the trajectory and pace of further U.S. rate increases.
Fed Chair Jerome Powell’s press conference will be closely watched for evidence of concern about the numerous U.S. trade spats and tariffs on the domestic economy.
The Canadian dollar is also vulnerable to events occurring in Europe. The new Italian government is in the process of hammering out a budget acceptable to the coalition partners and the European Union. One side, tired of austerity, wants to increase spending. If that sides prevails, it sets the stage for a nasty E.U./Italy confrontation. EUR/USD will slide and that U.S. dollar strength will undermine the Canadian dollar.
The E.U./U.K. Brexit negotiations appear to be heading south after the E.U. rejected the U.K.’s latest proposals. British Prime Minister Theresa May expected her plan to be the basis of a negotiation, which wasn’t the case. The E.U. rejected it out of hand and did not offer any proposals of its own. A "no-deal" Brexit would be negative for the euro and British pound while bolstering the U.S. dollar. The Canadian dollar would be collateral damage.
Surging oil prices could also destabilize FX markets. The Organization of the Petroleum Exporting Countries did not increase production to offset losses from the impositions of sanction against Iran and its oil. High oil prices could choke off global economic growth and lead to safe-haven demand for U.S. dollars. Canada wouldn’t benefit very much due to pipeline constraints limiting distribution of Canadian crude.
Today’s U.S. data includes the Case-Shiller Home Price index which is expected to be on the soft side. FX markets shouldn’t be bothered by the result.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
