NAFTA deal may be closer than it appears
The Canadian dollar was flat Thursday but it's tracked from 1.34 to 1.30in the past month. In fact, it's been the best performing major currency in the past month by a solid margin.
But it might be only the beginning.
Why?
First of all, the reason the rally got underway with the BOC's business outlook survey on June 29. That set the stage for the Bank of Canada rate hike on July 11. Then a renewed rally got underway after very strong retail sales, CPI and Tuesday's GDP number.
So if you look at the days and times of the Canadian dollar climbs, it's all come on economic data. That's the best, most-sustainable kind of rally.
A few things need to come together to sustain it. The central bank is the first one. Amongst the global central banks, the BOC is the least-predictable. Poloz believes there's some value in keeping us all off guard on rates so you can't bet with any confidence on what they're going to do next or over the next few years.
Instead, they are watching data. So we know that the data has been better but it's early. Still, the US is accelerating and that's going to spill over the border so the risks are starting to shift toward the upside on growth.
Second is the commodity picture and it's cloudy.
The main narrative that we hear is on the strength of commodities but that Canada isn't getting investment, partly because it's a tough place to do business. If you look more closely, almost none of this is correct.
Commodity prices aren't as strong as they appear. Today the spread between US oil and Western Canada Select hit the widest since 2013 at almost $31. Lumber, another major Canadian export, is down 45% since May. Industrial metals are around 15% down from the highs of a month ago and precious metals remain beaten down. On the flipside, investment in Canada is probably better than it appears. The BOC alluded to this in the Business Outlook Survey, specifically highlighting commodities. A real game changer would be if Canada could finally get its act together on LNG.
I don't think any of this is priced into the Canadian dollar because we're all holding our breath and watching NAFTA. If you objectively look at the headlines of the past week, it sounds like a deal is coming. The problem is that everything has heard all this before only to see it fall apart. So if you buy the loonie on this, you're in danger of being whipsawed. No one trusts Trump.
I increasingly believe it's going to get done. I think Republican donors have put a lot of pressure on Congressmen and they're relaying that to Trump. That's why there's been the sudden turn in Washington. If there's any headline that suggests progress on Chapter 9 or the sunset clause then it's a green light for a deal and the Canadian dollar then it's a quick trip to 1.26.
