According to Avery Shenfeld analyst at CIBC, the Canadian dollar is likely to rally if NAFTA negotiations end with a positive deal, but he warns that the potential rally could fade.
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“We caution that even if talks break off, they could just as quickly be restarted, a sequence we saw when Canada and the US worked out their first, bilateral trade deal in the last 1980s. And if a “deal” is reached, there will still be many pages of details to be filled in before we will know its full contents.”
“We’re in no better place than other observers to know how this story will end, but two things are certain: it won’t mean “free trade”, and it won’t be the end to Canada’s challenges on the export front. Remember that Canada and the US have been in a building trade war over the past two years, when NAFTA was still very much in place.”
“A NAFTA signing would not allow the Bank of Canada to completely remove the drag included in its forecast to cover trade uncertainties and their hit to exports and capital spending in Canada. The coast will not be clear on that front, at least as long as Donald Trump is in the White House.”
“Canada’s export performance, and its ability to attract related capacity expansions, has been unimpressive dating all the way back to 2000, long before these trade frictions emerged. Mexico has essentially agreed to handicap its ability to gain more of Canada’s market share in autos, but won’t roll back the clock on what’s already been lost, both to Mexico and lower-wage states in the US South. In other sectors, even if China starts to shed global market share under American tariffs, the swing will be to other low-cost EMs, or to the US itself if America keeps broadening the target list of countries.”
“While the Canadian dollar is likely to rally on any favourable NAFTA outcome, that’s a rally to fade rather than a bandwagon to hop onto. The Bank of Canada will still have to be careful about hiking at a pace that takes the loonie to firmer levels, given its desire to rotate growth towards exports from consumption and housing. And Canadian businesses will still be questioning whether this side of the border is the safest place from which to target the American market, given this President’s obsession with trade balances, and a somewhat tighter regulatory policy environment in Canada.”
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