Canada’s currency will push higher in the wake of a preliminary trade agreement between the United States and Mexico, according to BMO Financial Group.
The loonie gained as much as one per cent after U.S. President Donald Trump announced a bilateral trade “understanding” with Mexico on Monday. Trump took the opportunity to lob threats at Canada’s auto and dairy sectors, boasting that a “very simple negotiation” with the country could be over in a single day.
Foreign Affairs Minister Chrystia Freeland is set to re-join the NAFTA 2.0 negotiating table in Washington on Tuesday.
“The clearest indicator that the market is viewing the U.S.-Mexico deal as a positive for Canada is the strengthening of the Canadian dollar,” Benjamin Reitzes, BMO’s Canadian rates and macro strategist, wrote in a note to investors following the announcement.
“If Canada signs on to a deal, which is our base case (even if timing is fuzzy), expect the loonie to appreciate further.”
He points out that Monday’s 0.5 per cent jump on the heels of the announcement took place despite flat oil prices and narrowing interest rate differentials.
BMO forecasts that the loonie will appreciate modestly to US$78.4 by the end of 2018, and further strengthen to $0.80 in 2019.
Mark McCormick, Toronto-Dominion Bank’s North American head of FX strategy, is less optimistic that the loonie will hold onto its recent gains.
He sees Canada under greater pressure to accept U.S. trade terms in light of Trump’s renewed threat to slap punishing tariffs on vehicles and auto parts entering his country from Canada.
“Whether or not Canada agrees with the concept of a NAFTA reboot, we suspect it does little to benefit the loonie,” he wrote on Tuesday. “This backdrop leaves us fading Canadian dollar rallies and thinking that any positive headlines are likely to benefit Mexico’s Peso.”
Reitzes notes that while the U.S.-Mexico agreement provides some optimism that a deal can be reached with Canada, there is no indication that the Bank of Canada will see this as justifying a rate hike next week.
“The BoC is unlikely to alter its forecast,” he wrote. “Until there is a more definitive result on NAFTA, expect the status quo from the BoC on policy, leaving our call unchanged for the next BoC rate hike to come in October.”