As NAFTA negotiators continue to seek common ground and try to find a resolution the uncertainty is putting pressure on the Canadian economy.
Canada is under pressure to strike a deal with the U.S. alongside Mexico before the end of month. Both Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland were in attendance at the United Nations General Assembly in New York this week where informal talks continued.
Back in August when the U.S. and Mexico agreed to a Bilateral agreement, the threat of a 25% tariff on automotive products was introduced for the Canadian auto industry. Catharine Sterritt, portfolio manager for CIBC Asset Management stated last week “We’re anticipating there will be a resolution-certainly there’s already been lots of indication that the auto piece has been agreed to in principle”. Needless to say, Canadian auto suppliers have the most to benefit from a NAFTA deal.
The Canadian Dollar
The uncertainty over trade negotiations has made the Canadian dollar weaker over the last few months. A NAFTA resolution would have a positive affect on the Canadian dollar. As of September 25th the dollar was trading slightly lower (US$0.772) than it’s 12-month average (US$0.779). If a NAFTA deal is not struck and tariffs are introduced, the Canadian government would have to let the dollar weaken further to offset the negative impact on exports.
Throughout this time, the Bank of Canada has been raising interest rates slower than originally planned, keeping its lending rate at 1.5%. The central bank also said it was “monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook.” Rising inflation is not good for the Canadian consumer as the cost of goods will start to go up. If a deal is reached, we will see the Bank of Canada continue with its plan of slowly raising interest rates which will keep inflation at bay, and have a positive effect on the financial sector (banks).
What about US-China tensions?
“The ongoing trade negotiations and tariff dispute between China and the U.S. are an additional and equally important issue,” Sterritt says. “As we’ve seen an escalation of the back-and-forth tariffs, it certainly has put at risk the synchronized global growth that we have been seeing,” she said. Global growth has been very strong the last couple of years; if tariffs are introduced on both sides, costs are going to go up which will ultimately slow down global growth.
In the end, most experts agree a NAFTA deal will be negotiated and life will carry on. Be assured that the money managers are using this time of uncertainty to uncover new opportunities and are rebalancing portfolios to both grow and protect our savings.
Have a great weekend,
Tracey
Source: Original article posted on Advisor.ca by Katie Kerr 09-26-18.