Loonie Makes Most of US-Mexico Trade Deal but Will Struggle from Here, Says TD

The past 24 hours in markets have been dominated by news that the US and Mexico have reached a preliminary trade deal. The Mexican peso initially gained as reports came in but now trades at pre-announcement levels. The Canadian dollar gained handsomely but is set to struggle from hereon in according to Toronto-Dominion Bank.

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Monday’s US-Mexican trade deal did less for the Mexican peso than it did for the Canadian dollar, most likely because an agreement with Mexico had been largely priced in, evident from the peso’s near-12 percent gain versus the dollar since June 15th. By contrast, prior to yesterday’s developments, the Canadian dollar had gained only 2.5 percent since the same date.

Conditions for a US-Canada agreement now look good, although Ottawa will likely still have to negotiate with a Washington team taking a hard-line approach.

Canadian dealmakers are, to an extent, backed into a corner. The US has indicated it may deal solely with Mexico and continues to threaten 25 percent tariffs on Canadian auto imports. Ottawa may be offered nothing more than a “take it or leave it” deal. “It’ll either be a tariff on cars [for Canada] or a negotiated deal,” Trump said on Monday.

Markets remain hopeful though, as are US officials.

“We are now inviting the Canadians in . . . and hope that we can reach a fair and successful conclusion with them as well,” a US official told Reuters.

As reports came in on Monday afternoon (in Europe), the Mexican peso initially gained a percent to 18.6 per US dollar, before giving back all gains. The Canadian dollar, by contrast, continues to hold its gain of 2 cents, or roughly a percent, at 1.294 – the loonie’s strongest level in 2 ½ months.

The next few weeks will be rough for the Canadian dollar, believes Toronto-Dominion’s FX strategist Mark McCormick.

Speaking to Bloomberg, McCormick suggested the loonie would weaken from here as traders shift attention back towards monetary policy and, specifically, to comments this weekend from Bank of Canada Governor Stephen Poloz – comments indicating that the BoC would take a “more gradual approach to normalizing interest rates than traditional models would advocate.”

The loonie could begin its stumble later this week, McCormick says.


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