The Canadian Dollar Outlook Clouds after "NAFTA Uncertainty" Returns from it's USMCA Grave

Image © Adobe Stock

- CAD outlook clouds further as NAFTA uncertainty returns from grave.

- U.S. lawmakers want stronger labour rights, enforcement in new deal.

- Comes as some technical, fundamental indicators point to a weaker CAD.

The Canadian Dollar outlook clouded further Thursday after an influential U.S. lawmaker said changes must be made to the new U.S.-Mexico-Canada Agreement before it will pass through the House of Representatives.

Democratic Party representative Bill Pascrell, who is set to lead the House Ways and Means Trade Subcomittee, told the U.S. International Trade Commission that provisions in the deal relating to the enforcement of worker rights need to be strengthened before it will pass through the lower chamber of Congress. 

It is not yet clear whether Pascrell's opposition, or even broader opposition to USMCA from within the Democratic Party, will be enough to derail ratification of the deal as it is possible that some Democrats will vote for it if the alternative is no USMCA and no NAFTA. 

The White House and its North American counterparts are aiming to have it pass Congress and the respective other legislatures before December 01, when Mexican President-elect Andres Manuel Lopez Obrador takes office.

 

"The ITC is due to provide feedback on it this week and leaders are expected to sign off on it at the end-month G20 meeting in Argentina. We’ll back a stronger US dollar this week and USD/CAD moving close to 1.33," says Chris Turner, head of foreign exchange strategy at ING Group, in a note to clients Monday.

The USD/CAD rate was quoted 0.35% lower at 1.3202 Thursday after having risen as high as 1.3264 earlier in the week. It is up 4.9% for 2018.

The Pound-to-Canadian-Dollar rate was quoted 2.2% lower at 1.6820, thanks to a calamitous turn in the Brexit saga, and has now declined 0.69% for 2018.

"Short-term patterns suggest a potential double top at 1.7250 (neckline trigger at 1.6950) which could dump the pound back to 1.6650 or so fairly quickly. Major support remains 1.6595/00," says Eric Theoret, a technical analyst at Scotiabank.

America's opposition Democratic Party won a House majority in the November 06 midterm elections so it now has the clout to sink legislation the Trump administration sends to Congress. 

The USMCA was born out of a September deal to save the North American Free Trade Agreement, which lifted a Domcles Sword of uncertainty from above the head of the Canadian economy. 

Some strategists had said the Loonie would fall as much as 20% if President Trump ended NAFTA without a replacement for it, as he claimed he would in the event that terms more palatable to the White House could not be agreed. 

Ending NAFTA would have impacted the Canadian Dollar by slowing the pace of economic growth, which economists say would lead to lower interest rates over the longer term than otherwise might have been the case. 

"Bank of Canada rate expectations have continued to soften with OIS now pricing just 4bpts of tightening for December and 21bpts of tightening for January. Measures of sentiment are shifting and the options market is showing signs of stabilization as the premium for protection against CAD weakness steadies at relatively low levels," says Shaun Osborne, head of currency strategy at Scotiabank. 

The Bank of Canada raised its interest rate by 25 basis points to 1.75% in October and said it will go on lifting its benchmark rate over coming quarters, potentially taking the cash rate up to 3.5%.

The message coming from the latest policy update was unambiguous and made clear that the BoC is gearing up to raise rates in what could be quite an agressive manner over the next year or more.

The market-implied Canadian cash rate for Wednesday 09, January was 2% at the beginning of November but has since declined to 1.97%.

Pricing in the same market also shows expectations of rate hikes in December 2018 and beyond the first-quarter of 2019 taking a knock over recent weeks.

Any further deterioration in that confidence could deal a blow to the Candian Dollar because of the influence changes in rates can have on capital flows and their allure for short-term speculators.

Advertisement
Bank-beating exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here