The Canadian dollar received a wide array of good news of late, including a rate hike that wasn't on the cards that long ago. Yet the loonie cannot fly. The main reason is the big worry about the North American Free Trade Agreement (NAFTA) that remains in the hands of US President Donald Trump.
While there is a good chance that Trump will heed the sound advice of his advisors and just push for small changes to the 20+ year-old agreement, the risks are certainly holding the Canadian dollar back.
Canada gained around 79K jobs in November and around the same number in December. This not only beat expectations but blew them away. For those of you that are more familiar with the US Non-Farm Payrolls, 79K job gains in Canada are comparable to around 700K new jobs in the US. And that happened two months in a row. The US needs something like seven months to see the kind of job increases that Canada saw.
This was the main trigger for the rate hike. The Bank of Canada set the rates at 1.25% on January 17th, the highest since the financial crisis. They had already hiked the interest rate twice in 2017, but that was a “normalization” to the pre-oil crash levels: they cut rates twice in 2015.
And what about oil? Canada's main export is also back to the highest levels since the crash, some three years ago. WTI broke above the 2015 high and is around $64. While prices fluctuate all the time, inventories of the black gold are finally falling.
And Canada isn't only about jobs and petrol exports. Other parts of the economy are blooming as well. This was noted in the recent business survey by the BOC. Sure, there were some figures that missed expectations, but in general, the economy is looking great.
Fear about NAFTA
Trump called the NAFTA “the worst deal ever” and opened it for renegotiation. The talks have seen quite a few rounds and they aren't going anywhere fast. There is a potential deadline: Mexico's Presidential Elections later in the year. Yet more importantly for the C$, is the commentary from Canada. Officials have expressed worries about the deal totally falling apart.
