The Latest on NAFTA and the Canadian Dollar: Here's What the Analysts are Saying

USD/CAD has fallen below 1.2400 amid perceived optimism over the NAFTA negotiations. Below, analysts give their latest views on the talks and what may be in store for the Canadian Dollar. 

The North American Free Trade Agreement can still be saved, according to US Secretary of Commerce Wilbur Ross, although a successful renegotiation of the pact remains far from guaranteed.

Ross told CNBC News that “there’s a good chance” Washington’s effort to renegotiate the accord, which enables free trade between Canada, Mexico and the US, will be a success.

However, President Trump’s threat to tear up the agreement if it is the only way to get a better deal for America remains on the table.

The Canadian Dollar failed to draw a bid from the comments made by Ross during his trip to the World Economic Forum at Davos, Switzerland.

Insteady, the Loonie traded deep into the red against all of the G10 basket, barring the US Dollar, during the noon session Wednesday. 

Much of this weakness persisted during the overnight session although, during early trading in London Thursday, the Canadian Dollar managed to eke out a small gain over the US Dollar, Pound, Euro and Yen.

Ross' comments and recent price action come midway through the sixth round of NAFTA negotiations which, set to conclude Monday, is yet to yield any progress toward resolving five key issues President Donald Trump’s administration has with the accord.

Readers can learn more about the issues at play in the NAFTA talks here; Canadian Dollar Unprepared For NAFTA "Tape Bombs" - Key Issues to Watch.

Meanwhile, analysts are giving their views below on the status of negotiations and the near term trajectory for the Canadian Dollar.

Above: USD/CAD rate shown at weekly intervals.

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Analyst Views:

Shahab Jalinoos, FX strategist, Credit Suisse

“Last week's positive mood triggered by news of Apple's repatriation plans was swiftly overwhelmed by government shutdown and then President Trump's decision to impose tariffs on solar panels and washing machines from major trading partners like China and Korea.”

“The trade tensions add to the sense that the US remains the greatest source of G10 political uncertainty for now, even with issues like March's Italian election and ongoing Brexit talks on the slate.”

“Our core view is that the current round will produce a tentative form of agreement on selected key issues, and that this might take the form of an extension of NAFTA negotiations beyond the current deadline of Q118. We favor expressing this view via short USDCAD position than via USDMXN.”

“The top item on the agenda will be the US’ request to amend the rules of origin requirement in the auto sector....We tend to view the rules of origin topic as the most influential for the overall outcome of the talks”

“The elimination of the dispute resolution mechanism regulated by article 19 of the NAFTA treaty will also be in the spotlight.... Local and trade news sources have been remarkably quiet on this front, suggesting this issue might go unresolved for now.”

You-Na Park, analyst, Commerzbank

“The 6th round of the negotiations between Mexico, Canada and the US about a possible realignment of NAFTA will start today in Montreal. Over the past few weeks optimism about the continued existence of the free trade agreement constantly alternated with pessimism.”

“The parties still have to reach a compromise on important issues such as the rule of origin in the automotive industry, the so-called “sunset clause“, which states that the agreement automatically comes to an end every 5 years unless all parties explicitly agree on its continuation, as well as US recognition of arbitration tribunals.”

“It remains a real risk that the US could end the negotiations and thus the agreement.”

Mathias Hartpence, policy economist, RBC Capital Markets.

“Washington and Ottawa are experiencing one of their coldest winters in decades - a fitting backdrop to the frosty state of NAFTA renegotiations between the U.S., Canada and Mexico.”

"The U.S. is seeking to ensure that NAFTA’s rules of origin boost manufacturing in North America, “as well as specifically in the United States.”

"Canada opposes U.S.-specific content threshold requirements and is likely to tolerate only a small increase to the current overall North American content requirement. A country-specific content requirement runs counter to trade liberalization." 

"Canadian negotiators are likely to hold firm in their position, not only to prevent disruption in the auto sector—which directly employs some 130,000 Canadians, including 75,000 in parts production—but also to avoid setting a precedent for country-specific content requirements in future trade agreements."

Viraj Patel, strategist, ING Group

“While our base case is that a break-up will be avoided, noise around NAFTA may act as limiting factor for CAD. But any actual fallout from negative NAFTA noise may be fairly muted."

"For now, we expect a 'NAFTA premium' to keep the CAD curve fairly flat - with markets instead see a 2H18 hike as more likely. USD/CAD looks to have found support at the 1.24 level - a significant breach of this seems unlikely in the absence of any further positive CAD developments."

Joel Kruger, FX strategist, LMAX Exchange

“The Canadian Dollar did a good job pricing in last week’s Bank of Canada hike, with the Loonie failing to materially extend gains despite the hike, given the more cautious message accompanying the central bank’s decision.”

“Overall, Canada’s recovery is still somewhat fragile, and this coupled with an unstable macro picture and plenty of uncertainty around the fate of NAFTA, should be keeping the Canadian Dollar from wanting to run much higher.”

“Broad based US Dollar outflows on soft Dollar policy and some encouraging updates on NAFTA have inspired this latest Loonie run, though there are still plenty of offers (USDCAD bids) expected to cap Canadian Dollar upside.”

Emmanuel Ng, FX analyst, OCBC Bank

“The CAD was supported by a mixture of sanguine comments from Trump on NAFTA talks, firmer crude, and a weak dollar complex.”

“Short term implied valuations for USDCAD are slipping once again with the floor at 1.2400 increasingly fragile with 1.2370 up next.”

François Dupuis, chief economist, Desjardins Research

“The key rate increase ordered by the Bank of Canada in January gave a shot in the arm to the Canadian dollar. This occurred even before the rate hike was announced, as Canada’s solid economic figures had left little doubt as to the central bank’s decision.”

“Higher oil prices also shored up the Canadian dollar at the start of the year. However, it took a temporary hit due to new concerns over the future of the North American Free Trade Agreement (NAFTA).”

“The Canadian dollar should remain close to US$0.80 in the short term, but is expected to appreciate slightly in the longer term.”

“The effects of the next expected rate hikes in Canada should be limited by a similar change in interest rates in the United States and by a slight drop in oil prices.”

“Less uncertainty about NAFTA could help the loonie, but the opposite is also possible.”

Joe Manimbo, senior market analyst, Western Union

“Canada’s dollar strengthened through a key technical level that launched it to fresh four-month highs. Stronger oil markets and a weaker U.S. dollar were the chief drivers of the loonie’s rise. But festering near the surface were NAFTA negotiations that started this week and run till Sunday.”

“The loonie found support at the margin after President Trump reportedly said yesterday that the talks were going ‘pretty well,’ a conciliatory tone that tempered fears of NAFTA’s potential demise.”

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