We see the further risk to depreciation of the Canadian dollar even as the US dollar verse Canadian dollar exchange rate has retraced the highs near 1.45 during 2016 where oil nearly trade at $20 per barrel.
Rise of US Protectionism
The value of a currency is all relative. A strong US dollar means a stronger USDCAD exchange rate. The US in its pursuit of protectionism for better or worse (mostly worse) would be at the expense of its trading partners. While it runs major deficits with China and Mexico. China is too hard to Trump to tackle. He will always pick on the weak which in this case will be Mexico.
The election of Donald Trump and the rise of trade protectionism will be negative for Canada given Canada is the United State’s largest trading partner. While all the focus has been on Mexico, much to the chagrin of USDMXN traders. One overlooked risk from the potential renegotiation of the NAFTA is the negative implications for Canada.
Most Favorite Nation No More
As a consequence any weakening of NAFTA would have flow on effects with Canada as trade agreements typically have a clause called the most favorite nation clause. This means that the same terms given to one party must be given to all parties. This usually applies even in agreements where they are no party to. This is to ensure countries will continue to benefit from the best trade access conditions even after signing the treaty.
During the rise of globalization, this became a driver of trade as favorable trade agreements are applied to all and it only went one way, more trade access. In the retracement phase, this means a reduction of trade status must also be applied to all. Essentially, in trade it is very hard to pick on specific parties unless you intent to apply the same to all other countries. This is why we think Trump’s protectionism will have wider implications because any wind back of trade access would have to be applied to Canada as well.
Wider implication on Australia Canadian Cross Rate
The uncertainty in regards to future NAFTA variation is negative for the Canadian dollar going forward. The bounce back in the key export commodity prices like iron ore and liquefied natural gas prices will support the AUD while we only see largely downside for the CAD given above. As we outlined in our AUDCAD forecast we do not expect the exchange rate to deviate from its traditional range bound movements. However we are gradually shifting in our view and will update accordingly.