Yahoo Finance Why NAFTA 2.0 won’t stop the loonie from falling to 70 cents US in 2019
The Canadian dollar is not about to make up the ground it lost against the greenback since NAFTA 2.0 talks started one year ago, even if a deal were inked today, according to an analyst calling for the loonie to slump to 70 cents US in 2019.
Stephen Brown, the senior Canada economist at Capital Economics in London, expects weakening commodity prices, and a widening interest rate spread between the Bank of Canada and the U.S. Federal Reserve, will weigh on the currency into next year.
The Canadian dollar has skidded about eight per cent since its recent peak near 82 cents US last September. The loonie averaged 76 cents US on Wednesday.
Thursday marks one year since Canada, the United States and Mexico began the first round of talks aimed at modernizing free trade on the North American continent. Twelve months later, signs of progress on key areas such as content rules for cars and intellectual property are emerging from recent bilateral talks between U.S. and Mexican representatives. However, a clear path to a three-party deal remains to be seen.
Brown said the protracted uncertainty has directly weighed on the loonie, as investors demand higher premiums to hold Canadian assets. At the same time, he sees the negative economic implications of fruitless trade talks impacting the Bank of Canada’s outlook for its key interest rate.
Even if the trade concerns evaporate upon news of a deal, Brown doubts Canada’s currency will rebound in a meaningful way in 2019.
“Even if there was a NAFTA deal in place. Say they agree on one this month, with the exact same terms as before. I don’t think the loonie would necessarily regain all of its lost ground,” he said.
Brown sees no reason why a deal can’t be reached in a timely fashion. However, he warns investors will continue to look upon Canada with uncertainty until an agreement is fully finalized, given U.S. President Donald Trump’s unpredictability.
“There is hope for a deal at the top level, but I think by now everybody knows that you can’t really take Trump at his word. There is a big chance he just changes his mind,” Brown said. “He likes bashing Canada at the moment. That much is obvious.”
An “across the board” commodity slump will further weigh on the loonie, Brown predicts, pointing to weakening global economic growth slowing demand of Canada’s biggest exports, and lower prices for Western Canadian Select crude oil versus the U.S.-benchmark West Texas Intermediate.
Brown also anticipates the Bank of Canada will hold off on its “gradual approach” to raising its benchmark interest rate after one additional rate hike this year. That’s due in large part to potential housing weakness on the horizon.
“We’ve had a lot of good news on the housing market front. That seems to have made investors increase their bets on another interest rate hike this year. We certainly wouldn’t rule that out, but if we look at new housing starts in big cities, they have deteriorated a lot,” he said. “We’ve basically assumed at the moment some rate cuts as a result of the construction downturn.”
Meanwhile, Brown expects the U.S. Federal Reserve will press ahead with a rate hike per quarter over the next year, increasing demand for U.S. dollars and further weakening the loonie.
“If you’ve got commodity prices falling, the interest rate spread between the U.S. and Canada widening, regardless of whether the Bank of Canada cuts or not, all those factors lead us to expect the loonie to depreciate next year.”
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