Canada: Economy stuck between NAFTA, Trade Wars and BoC Policy – TDS

Analysts at TDS note that US-Canada trade relations hit a pivotal turn with President Trump’s imposition of steel and aluminum tariffs.

Key Quotes

“In addition, protectionist threats will be taken even more seriously by Canadian markets and businesses, as rhetoric is now being followed up with action. Finally, the tariffs have effectively precluded a NAFTA deal by the July 1 goal.”

“As a result, the risk of a full-blown trade war is higher, the timeline of NAFTA talks has lengthened and the risk of Article 2205 being invoked (a precursor to a unilateral exit from NAFTA) is higher though still low.”

“Despite worsening tensions on trade, we continue to expect the Bank of Canada (BoC) to proceed with a July rate hike. Although economic data has softened of late, the broader backdrop is still in line with the BoC’s forecast from April.”

“CAD’s return profile remains asymmetrically skewed to the downside with the risk of a trade war still being underappreciated. The recent run-up in USDCAD is consistent with our HFFV estimate, suggesting that there is still room for the pair to price in a risk premium. We continue to look higher as the path of least resistance for USDCAD with 1.35 our first mark as a reassessment point.”