The faith of investors in the preservation of NAFTA contributes to the decline in the USD/CAD

If you can not break a broom at once, break each of its twigs separately. Donald Trump knows well how to divide and conquer and sees success in negotiations with Mexico as the next step in the revision of NAFTA. All that remains is to force Canada to join its new format - and it's done! And if it's reluctant, we can always introduce duties on cars. According to the US President, this is a huge amount of money. If Ottawa refuses to sign the contract, it will flow into the States.

Alas, but life is filled with paradoxes. Where it seems simple, we face difficulties. And the reaction of the markets proves this. Together with the strengthening of the Mexican peso, shares of automakers and US stock indices, the Canadian dollar has also grown. It does not seem that investors believe in new duties from Washington. Moreover, within the limits of the powers conferred by the Congress to the President, it is easier to have a trade deal with the three countries than to throw Ottawa out of the agreement. The maple leaf country has one more advantage - it's in no hurry. But the States will see an intermediate election in the fall.

Mexico made concessions, increasing the share of North American components for the export of cars to the US from 62.5% to 75%. At the same time, the share of employees involved in the production of cars earning $ 16 per hour, increased from 40% to 45%. This will limit the ability of companies to move factories south due to cheap labor. It is curious that the tariffs imposed by the states on steel and aluminum remained in force, and the deal could be revised after five years. The breakthrough in the negotiations is the clear success of Donald Trump. It is especially important from the point of view of the deficit of US foreign trade with Mexico. In Canada, everything looks much better in terms of figures.

Trade imbalances of the USA with other countries of the world

Source: Bloomberg.

The stumbling block is Canada's system of protection of dairy product producers and subsidization of individual industries. Judging by the statements of Justin Trudeau, Ottawa is ready to make concessions, but is not going to completely abandon the previously established rules, as required by Donald Trump.

If Canada soon joins the updated version of NAFTA, the investors' attention will completely shift to the BoC monetary policy. The probability of a third increase in the overnight rate in October is estimated by the derivatives market at 80%, which, according to TD Bank, makes the potential of the USD/CAD going south limited. It recommends buying the  pair at 1.295. Credit Agricole, on the contrary, adheres to bearish views and continues to sell the US dollar against the loonie in the direction of 1.265 due to a decrease in political uncertainty and gradual unwinding of the annual highs of speculative net shorts for the Canadian dollar in July. The median forecast of Bloomberg's experts on the USD/CAD at the end of 2018 is 1.29. Personally, I am more impressed by the position of Credit Agricole. At the same time, the negative sentiment from the negotiating table between Washington and Ottawa can lead to a sharp rise in the pair, which is reasonable to use for sales.  

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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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