NAFTA Tensions, Trade War Expected To Send CAD Lower

It has been 10 months since the US, Canada, and Mexico started to renegotiate the North American Free Trade Agreement (NAFTA). Trade representatives were originally scheduled to complete talks by the end of December 2017, but the deadline has been extended several times, creating a great deal of uncertainty surrounding the Canadian dollar.

Trump Says NAFTA Talks Progressing

US President Donald Trump told a small group of business executives that NAFTA negotiations between the US, Canada, and Mexico are progressing, despite harsh comments emanating from both Washington and Ottawa over the last month.

Speaking at the National Federation of Independent Business (NFIB), President Trump did hint that his administration is open to striking bilateral deals should NAFTA talks fail.

“We’re trying to equalize it. It’s not easy but we’re getting there. We’ll see whether or not we can make a reasonable NAFTA deal,” Trump told the crowd.

“We have to change our ways. We can no longer be the stupid country. We want to be the smart country.”

White House economic adviser Larry Kudlow echoed the president’s remarks. He stated in an interview with the Fox Business Network that the president has been thinking about splitting NAFTA talks into separate negotiations with Canada and Mexico.

US Secretary of State Mike Pompeo, who delivered a speech at an Economic Club of Detroit luncheon in Detroit on Monday, does anticipate a deal in the coming weeks as all parties iron out “things that were out of whack.”

Mexican Peso Surprises Investors

NAFTA frustrations initially sent the Mexican peso tumbling to a 15-month low.

Since then, however, the USDMXN has made up for much of those losses, rebounding as much as 0.09% to 20.5415.

Mexico, too, has been engaging in bitter trade disputes with the US amid NAFTA consultations. Last week, the Mexican government announced that it would impose a 20% tariff on US pork products worth about $1.07 billion in retaliation to levies on its steel and aluminum exports.

Canada Wants a ‘Win-Win-Win Deal’

The Canadian government is also optimistic that a “win-win-win deal” can still be achieved.

Foreign Affairs Minister Chrystia Freeland told the House of Commons international trade committee on Tuesday that discussions to modernise NAFTA have stalled because the US keeps demanding major changes, such as the recommended five-year sunset clause. She says Mexican and Canadian representatives continue to make accommodations to get a pact finished.

Even as Ottawa prepares a list of retaliatory tariffs that go into effect on July 1, Freeland confirmed that she has spoken with both US Secretary of State Mike Pompeo and Trade Representative Robert Lighthizer in recent days. Freeland noted that she believes there is “goodwill” from all three sides.

“A modernized win-win-win deal that benefits all three NAFTA partners is possible and we continue to work hard and patiently to achieve this outcome,” Freeland told lawmakers.

“I remain convinced there is goodwill and a desire to move forward on the NAFTA negotiations. We will be working hard over the summer.”

Whatever the state of talks may be, the recent events, or lack thereof, have been sending the Canadian dollar much lower.

CAD Sharply Weaker Against USD

In the early trading week, the Canadian dollar has been free-falling, slumping to a near 12 month low and bringing the price of USDCAD to 1.3276.

In addition to fledgling NAFTA talks, investors fear that a trade war between the US and Canada may intensify. Last month, the Trump administration slapped a 25% tariff on steel and a 10% levy on aluminum imports from Canada. This prompted Canada to retaliate a day later with tariffs on $16.6 billion worth of goods, ranging from bourbon to toilet paper to lawnmowers.

The US has also threatened to target agricultural, automobile, and dairy imports, which would inevitably lead its biggest trading partner to respond. And this may not be good for Canada or its currency.

The brewing trade war, should it escalate, could harm the Canadian economy over the next two years, warns TD Bank.

According to senior economist Brian DePratto, the economic impact of a 25% tax on fully assembled vehicles and a 10% tariff on car parts could cost Canada up to 160,000 jobs. This is a substantial finding considering that 1.7 million Canadians are employed in the manufacturing sector, including 771,000 who are situated in the province of Ontario.

If the gloomy estimates turn out to be correct, then the country might experience a 64-cent US loonie by the end of 2019, says the report author.

Conclusion

The bearish outlook for the Canadian dollar might change by the end of the week with key economic data scheduled to be released. Retail sales and inflation numbers may give the Canadian dollar a boost, especially since analysts are anticipating inflation to rise 0.4% month-over-month. This could give the Bank of Canada ammunition to pull the trigger on a July interest rate hike, potentially lifting the loonie from multi-month lows. Until then, the Canadian dollar will continue to struggle.

Want the latest data on how the markets are reacting to the latest news? Log into your Exness account now for real time USDCAD prices plus more than 120 other currency pairs and instruments. Don’t have an account yet? Create one now and start trading today!