12.01.201800:05 Forex Analysis & Reviews: USD/CAD: NAFTA gap - a bearish trend decision

The high prices of oil could not support the Canadian currency. The USDCAD pair pushed away from the local low at 1.2354 and headed toward the 26th figure, the breakthrough of which is expected in the near future.

Canada's fundamental background has changed quite quickly. Growing oil and a high probability of an increase in the Bank of Canada's interest rate held in the tone of the the bears of the USDCAD pair, determining the downward trend. But the failed negotiations on the fate of the NAFTA (the North American Free Trade Agreement) weakened the Canadian people throughout the market. The "fly in the ointment" was too toxic: now traders are focused only on this fundamental factor. Oil has fallen into the background, and the issue of raising rates is seen through the prism of recent events.

It should be noted that at the end of last year (in October), the Bank of Canada expressed concern about future trade relations with the United States. At that time, the penultimate round of negotiations between the representatives of Canada, the United States and Mexico was held, which subsequently ended in vain. As noted by the Canadian regulator, US protectionism and competitiveness problems will eventually lead to the fact that the companies of Canada will transfer their production abroad. In other words, the Canadian central bank pays special attention to the issue of revising this Free Trade Agreement in the context of further prospects for tightening monetary policy. Given such uncertainty, the regulator may take a wait-and-see attitude, although the market estimates the probability of an interest rate hike at the January meeting of 85%.

Trilateral talks should be completed before spring: in May, the presidential election campaign begins in Mexico, and the parties initially agreed that the dialogue will last until its start. As late as last autumn, the representative of Canada voiced the key phrase: "Our country hopes for the best, but prepares for the worst." The Canadian dollar reacted to these words with a large decrease, as the context of the situation was obvious: the Americans do not make any compromise, so the treaty is likely to be terminated, with all the ensuing consequences.

It is worth noting that the free trade agreement did not "crystallize", not even once: over the course of 14 years, the sides gradually canceled trade duties, and this process was never completed. Dairy products, flour, sugar and a number of other products in the agrarian sector are still subject to duties, despite the ongoing negotiation process (until Trump's election).

After the victory of the current US president, the asymmetry of relations between the three countries and America's dominant position came to the fore. In general, Donald Trump promised to reconsider this agreement during the pre-election campaign, because, in his opinion, because of the deal, Americans lost more than a quarter of all their jobs in industry. Trump's political motto "America first" was fully implemented in the process of revising the NAFTA treaty. The parties do not disclose the details of the negotiation process, however, according to the Canadian side, their American counterparts make absolutely unacceptable demands, especially in the automotive industry and agriculture.

The sixth and final stage of the talks should begin in Montreal next week - January 22nd. But now there is information that Trump will announce the withdrawal from the agreement. So far, it's only speculation: "informed sources" in the Canadian government told CBC about such plans of the American president, while there are no official comments on this.

In turn, Reuters reported with reference to its sources that Mexico will also withdraw from the negotiation process if Trump announces the start of the semi-annual exit procedure from the NAFTA.

Thus, the fate of the North American Free Trade Agreement hangs in the balance. In April last year, the US president was already ready to break the deal, but after a telephone conversation with the leaders of Canada and Mexico, he decided to withhold the active action. After that, a tripartite negotiation process was started, which, as we see, did not lead to anything.

The importance of NAFTA for the Canadian economy is great: the mere fact that the USDCAD pair is growing against the backdrop of record-high oil prices speaks volumes. The termination of the contract will also affect the resolve of the Bank of Canada. With a high degree of probability, the regulator will take a pause for an indefinite period, despite the growth of key macroeconomic indicators. Such prospects have a significant impact on the national currency of Canada, especially coupled with the US dollar.