USD/CAD awaits verdict on NAFTA – one scenario is more priced in than the other

The Canadian dollar enjoyed a wide range of upbeat economic figures, a rate hike, and also rising oil prices, but its gains were limited. Worries that the North American Free Trade Agreement would be abandoned by the US, kept the loonie back.

Last week, the US dollar took another plunge, mostly ignited by Mnuchin’s endorsement of a weak dollar. Despite being somewhat taken out of context and Trump’s bullish comments on the greenback, the American currency suffered and the Canadian dollar was finally able to take advantage of it to slip to the lower ground.

Talking in Montreal

In the background last week, another formal round of NAFTA talks continued in Montreal. It wasn’t led by the key negotiators, which spent time in Davos. And now, they are back at the table for the final day of the talks.

Reports coming out so far talk about progress, which is good for the loonie and can explain some of its gains. On the other hand, there are clearly some key issues such as arbitration that remain open.

And, one day after this round of talks concludes, President Trump makes his annual State of the Union (SOTU) address to Congress. Rumors that he would use the opportunity to ditch NAFTA have been making the rounds, but they are probably not true, or at least too early.

All in all, there is a high level of uncertainty and nothing is fully priced in. However, optimists are in the lead. 

Many hope that cooler minds will prevail and that the clear overall advantages of the trade deal will trump smaller issues. In this case, there is room for the loonie to advance, with 1.2280 and 1.2070 as the next downside targets for USD/CAD.

NAFTA talks outcome and USD/CAD

The gains for CAD / drops for USD/CAD may be limited, as there are hopes that the interests of various US states have already convinced the administration in Washington not to abandon the deal.

Yet if the US unilaterally blows up the deal, the C$ has a lot of room to the downside: 1.2435 is the immediate target but it could easily fall and then 1.25 and 1.2540 come into play.

But as a full blow up of NAFTA is the less-priced-in option, we could see much higher levels such as 1.30 becoming relevant. Before 1.30, we have 1.2670, 1.2790, 1.2920 and 1.3020.

What do you think? Where will NAFTA go? And where will USD/CAD go?

More: USD/CAD: Pricing A Higher NAFTA Risk Premium Into The Loonie;


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