In 2017, the dollar fell more than 10% against its global peers. Among the currencies that strengthened against the dollar was the Canadian Dollar. The dollar fell from a high of 1.37844 to a low of 1.2063 in September.
After that, the dollar tried to recover, rising to the 1.2902. It didn’t go well. As shown below, the pair established a strong resistance at this level before starting to head south.
Yesterday, the Canadian Dollar was crushed after reports indicated that Trump was close to exiting the NAFTA deal.
As you know, NAFTA is a major deal that removes tariffs and other barriers to trade in the United States, Canada, and Mexico. The 20-year old deal has been credited for helping the three countries by opening markets and removing unnecessary barriers.
However, NAFTA has also been blamed for hurting American industries. With the deal, American companies have been able to move their operations to the less-regulated Mexico where they can find cheap labour.
Among the contentious issues on NAFTA are the Rules of Origin, Dispute Resolutions, Agriculture, Supply Management, Currency Manipulation, Government Procurement, and Investor-State Dispute Settlement. In the current negotiations, the three countries have adopted hardline positions with Trump threatening several times that he would exit the deal.
This will not be easy because an exit needs to be ratified by congress and the senate. In both houses, there is consensus that the deal needs to be renegotiated and most representatives will not accept ending it. Besides, agriculture is a major component of NAFTA and most farmers voted for Trump. Also, there is a consensus that auto manufacturing which moved from Detroit to Mexico was unlikely to return.
I believe the sell-off on the Canadian dollar – and Mexican Peso – were unwarranted. As mentioned, it is unlikely that the US will fully exit the deal and perhaps, traders need to consider taking the contrarian views.