The American-imposed deadline for the Canada/U.S. North American Free Trade Agreement renegotiation is September 30. It is likely to pass without a new deal as both sides appear to be unwilling to move from entrenched positions. U.S. President Trump said Canada’s negotiators were "unwilling to offer concessions" and went on to complain about Canada’s negotiating style and negotiating personnel. U.S. Trade Representative Robert Lighthizer echoed the President’s sentiments.
Trump has repeatedly threatened to impose 25% sanctions on imports of Canadian cars if the two sides did not come to terms. If implemented, the tariffs would have a nasty impact on the Canadian economy with Ontario suffering the most. At the same time, the highly integrated U.S./Canada auto and auto parts supply chains suggest that the American’s would suffer greatly, as well. They vote. U.S. mid-term elections are set for November. Trump may not want to risk annoying his support base or Republican senators, at least until December.
For Canada, missing the American trade deadline is not a big deal. U.S./Canada trade is too important for both sides which means trade talks will continue.
Canadian dollar traders appear to concur with the above sentiments. Despite the fairly dramatic price swings during September, the Canadian dollar is ending the month little changed from where it started.
The Canadian dollar is supported by the prospect of another Bank of Canada (BoC) rate increase at its October 25 meeting. BoC Governor Stephen Poloz has repeatedly said that the Governing Council does not make policy based on headlines but only on data. So far, the domestic data has been good. For the Bank, missing the NAFTA deadline may be a concern but not a big enough concern to avoid raising interest rates if warranted by economic data.
The Canadian dollar is also squeezing out a bit of support from oil prices. Oil prices have risen steadily since the middle of August and are back at levels last seen in November 2014. That is when Saudi Arabia decided that recovering lost market share was more important than price. They have since changed their minds and convinced the rest of the Organization of Petroleum Exporting Countries to curtail production.
The Canadian dollar is still vulnerable to external forces. The U.S. Federal Reserve is on track to hike interest rates again in December and then four more times in 2019. The European Central Bank, on the other hand, has stated unequivocally that European interest rates will remain unchanged until at least the summer of 2019. It is not the only central bank to do so. The Reserve Bank of Australia is sidelined until well into 2019, and the Reserve Bank of New Zealand said rates are on hold until 2020. The Bank of Japan is another. It will keep monetary stimulus in place until inflation hits 2%. It is sitting at 1.12%. Broad demand for U.S. dollars will undermine the Canadian dollar.
USD/CAD trading will be choppy today due to the release of July gross domestic product data and month end portfolio re-balancing flows.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians