USD/CAD Canadian Dollar Flat as NAFTA Comments Keep Loonie Under Pressure

The Canadian dollar is flat versus its US counterpart on Thursday. The US dollar fell against most major after the Trump Administration criticized the GOP plans for another short term funding bill to avoid a government shutdown. The loonie did not take part as Trump also issued another threat directed at NAFTA in a tweet targeting the proposed wall between Mexico and the United States. The Bank of Canada (BoC) hiked rates 25 basis points on Wednesday and for all the hawkish rhetoric about the economy even the central bank had to admit that the fate of NAFTA remains uncertain.

The growing risk the US pull out of the trade agreement has been already been voiced by anonymous Canadian officials and has put the loonie under pressure versus the US dollar. The three members of NAFTA originally wanted to avoid going into 2018 without the details of the deal hammered down. Mexican presidential elections in July and the US primaries in November could interfere with the already divisive topic and could politicize even further forcing it decision based on populism and not economics.

The sixth round of negotiations will kick off in Montreal on January 23 and will go until the 28. This round is of particular note given that the Foreign ministers will rejoin the talks after skipping the November and December talks.

The USD/CAD was flat on Thursday. The currency pair is trading at 1.2435 after the gains for the loonie after the central bank decision to raise rates were quickly erased on concerns about the end of NAFTA.

The Bank of Canada (BoC) has now hiked three times since the summer of 2017. After two rate cuts in 2015 Governor Poloz had been cautious to remove the stimulus, but that suddenly changed in July in which various members of the monetary policy team dropped heavy hints that a hike was coming. The BoC followed that with a small surprise by hiking one month ahead of the expected date in September. The tone of the CB changed to one more neutral with no rate moves expected until the end of the first quarter.

The November and December job reports in Canada changed all that. Both had gains of 70,000 jobs and brought the unemployment rate to a 40 year low. Governor Poloz had a tough task, keep removing stimulus but at the same time warn about potential headwinds. His strategy was to focus on the actions of the Trump Administration. The tax cuts approved in December in the US could end up reducing investment in Canada, just as the negative impact of the end of NAFTA could derail the Canadian growth story.

The USD has failed to gain traction in 2018 and politics is very much a part of what is wrong with the greenback this year. US congress is having trouble finding a way got avoid a government shutdown with the clock ticking down and President Trump complicating matters. The primaries in the fall are not looking good for the Republican party, but they are finding it challenging to break away from the President and that could cost them control of the House and the Senate.

West Texas Intermediate rose in the last 24 hours. The price of WTI is trading at $63.91 after the Energy Information Administration (EIA) released it’s weekly US crude inventory data. Oil inventories dropped 6.9 million barrels nearly doubling the forecasted drawdown. The lower than expected subdued some of the concerns that the Organization of the Petroleum Exporting Countries (OPEC) oil production cuts would be under assault from higher US output. boosted oil prices higher. OPEC released its own forecasts with an emphasis on rising non-OPEC output in 2018. The group expect producers not part of the Vienna based organization and also not part of their oil production cut to increase their supply by 1.2 million barrels a day, and increase of 160,000 from earlier estimates.

The price of oil will continue to be in a tug-o-war between OPEC oil cuts and rising US shale production. For now weather events and other supply disruptions have supported prices, but as those issues disappear energy prices will be under pressure if there are no geopolitical or weather related events that once again limit oil production.

Market events to watch this week:

Friday, January 19
4:30am GBP Retail Sales m/m

*All times EDT