USD/CAD: NAFTA deal not a game changer - CIBC

According to analyst at CIBC, the USD/CAD pair could briefly visit 1.28 on a NAFTA announcement and a follow-up Bank of Canada rate hike in October.

Key Quotes: 

“The C$ has been stuck in the mud of late, but positive developments on the trade front could be a catalyst for a very short-lived move to the strong side. Investors are awaiting confirmation of a NAFTA deal, something we expect to materialize in the next few weeks. While we could briefly visit 1.28 dollar-CAD territory on a NAFTA announcement and a follow-up Bank of Canada rate hike in October, and again as the USD generally weakens the first half of 2019, we still see that as the strong end of the likely range for the Canadian dollar in the coming two years.”

“Any new NAFTA is likely to represent more “give” than “take” in terms of what it means for Canada’s trade balance. A much longer term trend of mediocre real export performance going all the way back to 2000, and apersistent current account deficit since the recession, suggest that, if anything, the loonie will have to be weaker over the longer term to allow exports to play a greater role in growth if housing pulls back as a driver.”

“Governor Poloz will be hesitant to keep pace or exceed US rate hikes and risk strengthening the C$. A wider rate differential with the US should help reverse gains in CAD over the second half of 2019, and even as the US moves to ease monetary policy come 2020, export headwinds in a slowing global growth environment should see dollar-Canada in the low 1.30s range.”