The Canadian dollar received a wide array of good news of late, including a rate hike that wasn’t on the cards that long ago. Yet the loonie cannot fly. The main reason is the big worry about the North American Free Trade Agreement (NAFTA) that remains in the hands of US President Donald Trump.
While there is a good chance that Trump will heed the sound advice of his advisors and just push for small changes to the 20+ year old agreement, the risks are certainly holding the Canadian dollar back.
Canada gained around 79K jobs in November and around the same number in December. This not only beat expectations but blew them away. For those of you that are more familiar with the US Non-Farm Payrolls, 79K job gains in Canada are comparable to around 700K new jobs in the US. And that happened two months in a row. The US needs something like seven months to see the kind of job increases that Canada saw.
This was the main trigger for the rate hike. The Bank of Canada set the rates at 1.25% on January 17th, the highest since the financial crisis. They had already hiked the interest rate twice in 2017, but that was a “normalization” to the pre-oil crash levels: they cut rates twice in 2015.
And what about oil? Canada’s main export is also back to the highest levels since the crash, some three years ago. WTI broke above the 2015 high and is around $64. While prices fluctuate all the time, inventories of the black gold are finally falling.
And Canada isn’t only about jobs and petrol exports. Other parts of the economy are blooming as well. This was noted in the recent business survey by the BOC. Sure, there were some figures that missed expectations, but in general, the economy is looking great.
Fear about NAFTA
Trump called the NAFTA “the worst deal ever” and opened it for renegotiation. The talks have seen quite a few rounds and they aren’t going anywhere fast. There is a potential deadline: Mexico’s Presidential Elections later in the year. Yet more importantly for the C$, is the commentary from Canada. Officials have expressed worries about the deal totally falling apart.
The economies of Canada, the US, and Mexico all gain a lot on aggregate from the agreement, while there are few losers/ Yet if the agreement falls apart everybody will lose, with the smaller counterparts having more to lose. Canadian policymakers reminded us that Trump threatened to trash the deal altogether.
This kind of talk halted the Canadian dollar from further rallying on the US dollar’s weakness, but there was also tension towards the BOC rate decision.
Stephen Poloz and his team raised rates and were quite bullish on the economy. However, NAFTA stole the show. The trade deal was mentioned over and over again in the statement and in the press conference that Poloz gave with Deputy Governor Carolyn Wilkins. They didn’t need to express a huge worry about it. The mere repeated mentions did their job.
USD/CAD is stuck
Dollar/CAD dropped nicely from the triple-top of 1.2920 to as low as 1.2355 when things were going well for the loonie. Yet from that point, we had a big bounce to nearly 1.26 before things balanced out.
The rate hike and the optimism about the economy were good for a double bottom at 1.2355, but not for another decline. Everything awaits the deal or no deal.
If Trump allows his negotiators to cut a deal, USD/CAD could fall towards 1.20, with 1.2070 serving as a cushion on the way down. If everything blows up, we could see an attack on the triple-top at 1.2920.Get the 5 most predictable currency pairs