What happens when Trump

NAFTA negotiations are in their second day and will continue until next Tuesday. This is probably the make-or-break moment in the process and I'm increasingly convinced the next big headline will be the US delivering a letter that starts a six-month clock on an exit.

I spoke with BNN about what will happen to the Canadian dollar if/when Trump invokes the six-month exit clause.

Earlier this month, headlines circulated about Canadian officials being increasingly convinced Trump's next move is to pull out. The US denied it and the FX move was mitigated but I think the market got that wrong. Trump is waiting on counterproposals so he doesn't know what he's going to do next. The Canadian officials must have decided that they're not going to offer anything and that's how they know Trump is going to leave.

That's probably the right move. The challenge for the Canadian government is in evaluating what Trump will do. If you look at him, and you look at his history, and even look at the debt ceiling negotiations; he takes everything to the limit. So his strategy will be to take this round to the limit and then try to go beyond that by triggering an exit and taking that to the limit and then probably staying. It's up to Canada and Mexico to decide where that limit is and they're only going to get it by standing their ground.

So let's assume the US pulls out of NAFTA later this month. How far does the Canadian dollar fall? Given all the time that's passed, I think the market has a pretty good handle on the consequences. So it's not going to be too bad but it still probably means 1.2700 about 4-5 days after the headlines, depending on the rhetoric that goes along with it. If anything, I'd guess the risks to that are on the downside.

One thing I will be watching very closely is the initial reaction -- the reaction within 2 hours of the announcement -- if USD/CAD rises less than 1%, I think it's a dead giveaway that the market isn't concerned and that the move should be faded.

Given the US dollar's woes, I think that could also be the loonie's low for the year.