Canada has recently become a main focus for financial markets, following two wins for Prime Minister Trudeau. The big headline is the agreement to a new NAFTA deal called the United States-Mexico-Canada Agreement (USMCA).
This agreement removes a large cloud of uncertainty over the currency (CAD) considering Trump’s threats of “ruination” by imposing 25% tariffs on cars.
The second notable event is the announcement by Royal Dutch Shell to move forward on a CAD $40 billion dollar natural gas terminal in Kitimat BC. This will be Canada’s largest ever infrastructure project. The Kitimat LNG facility will open up Asia for Canada’s LNG resource enabling cargo to reach Tokyo in eight days compared to a typical time of 20 days via the US Gulf.
With USDCAD trading around 1.2825 from Friday’s 1.2908 close, it is interesting to note that last Friday the Canadian dollar was also the strongest currency (+1.05%) on the heels of firmer than expected Canadian GDP of 2.4%.
The surprise “Trifecta Win” of USMCA, LNG and GDP saw the currency market positioned the wrong way in CAD. Friday’s Chicago IMM data release shows a bearish speculative positioning of Short CAD $1.5 billion. Bank of Canada Governor Stephen Poloz had previously sited trade uncertainty as the big concern for the economy.
The interest rate market is reacting to USMCA by CAD supportive narrowing of US-CAN spreads (2Y now +56 bpts). The OIS market is pricing in a full 25 basis point hike (from 1.5% to 1.75%) from the Bank of Canada on October 24. The interest rate market has also priced in a 50% probability of another hike in January.
It seems likely that CAD could continue to outperform in the near term with the removal of trade tensions in North America.
The next key release is this Friday’s Canadian employment data forecast at +27,000 new jobs and a 5.9% unemployment rate.
For more information, please contact Hugh Sutcliffe, Director at JCRA, at Hugh.Sutcliffe@jcraca.com or call +1 647 714 8371.