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Two months of strong jobs numbers in Canada propelled CAD to a 14 week high against USD. Further the strength now being perceived across the economy has meant increased expectations of rate rises; which did come through on January 17th with a hike to 1.25% from 1.0%, the third such hike in the last seven months.
While this rate hike might seem like a no brainer for the “data dependent” BoC, it was anything but. There is huge uncertainty surrounding the renegotiation of NAFTA. The actions of political leadership in the US are of course difficult to predict and rumours abound that President Trump will shortly announce that the US is withdrawing from NAFTA. We hope to see a more concrete direction during the next round of NAFTA negotiations in Montreal.
The currency has also felt the impact of NAFTA uncertainty - CAD fell 0.62% against USD on the day these rumours surfaced in the press. This came as CAD was rallying to price in the upcoming anticipated BoC rate hike. In the following days, as these reports left the news cycle, CAD regained the ground it lost as a result of the uncertainty these reports generated.
Despite the hope that the US will provide some indication as to its anticipated course of action with regards to NAFTA at upcoming negotiations, uncertainty will continue to persist until a renegotiated treaty is ratified or a US withdrawal becomes official. Even an announced withdrawal could simply be a negotiating tactic used to win concessions from Canada and Mexico. The US is required to give six months’ notice of a withdrawal, but it is not obligated to act upon that announced withdrawal once the deadline strikes.
These developments present a situation where the overall economic tone should be positive for the CAD, but at the same time politics presents a very large event risk – the type of risk where well structured hedging should be considered, Depending on how this is designed, the movements and volatility may even work in your favour.
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