Better BoC forecasts on GDP and inflation will allow the USD/CAD bears to develop attacks
Progress in the NAFTA negotiations, confident oil prices, the return of investors' interest to the normalization of the monetary policy by the Bank of Canada and the weakness of the US dollar allowed the USD/CAD bears to drop quotations to the area of two-month lows. The loonie has proved its status of the best currency G10 in April in 1975-2017. It has closed in the green zone for 30 months out of 43 thanks to the flow of dividends and other payments. This time, other trump cards play on its side.
Dynamics of oil and USD/CAD
Source: Trading Economics.
As the regional elections in Canada (in June) and the presidential elections in Mexico (in July) approach, the States began to rush things and make concessions. While before Donald Trump threatened to pull the US out of the North American Free Trade Agreement if the American workers cannot improve their situation, now this topic has become uninteresting to the leader of the White House. He found himself a new bigger enemy. Ana his allies do not hesitate to dance to the tune of Washington in their need for attention. So official Mexico City said that if it imposed restrictions on the supply of steel and aluminum from other countries (i.e. from China) to its territory, it would be exempt from US import duties.
Elections in trading partner states are an important argument to back down. One of the candidates for the presidency in Mexico, Andres Manuel Lopez Obrador, promises to reduce the country's dependence on the United States and show Donald Trump his place. The opposition in Canada is likely to take advantage of the weakness of the current authorities in the NAFTA negotiation process. As a result, the States moved away from their demands to increase the share of cars and spare parts manufactured in North America from the current 62.5% to 85%. Now it is about 75%.
Progress on NAFTA is obvious, and the hope that the contract will be renewed in the spring grows by leaps and bounds. However, until this happens, the Bank of Canada will most likely remain cautious at its April meeting. Moreover, macroeconomic statistics leaves much to be desired. In the first quarter, the economy of the Maple Leaf country lost about 40,000 jobs, non-energy exports are regularly disappointing, and GDP is slowing down.
Dynamics of employment in Canada
Source: Trading Economics.
As a result, none of the 10 primary dealers in the Wall Street Journal survey expects an overnight rate increase from the current 1.25% at the upcoming BoC meeting. Most of them rely on at least one act of monetary restriction in the second half of 2018.
In my opinion, one should pay attention not to the rhetoric of the central bank, but to updated forecasts. Weakness of the Canadian statistics in the first quarter is due to the risks of the collapse of the North American Free Trade Agreement and the seasonal slowdown in US GDP. Most likely, during the remainder of the year the situation will change for the better. At the same time, the increase in the probability of three higher overnight rate raises in 2018 will push the USD/CAD quotes in the direction of 1.235 and lower.
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