Skip to main content
NewslettersWatchlist
NAFTA’s fire and ice: And you thought the Canadian dollar was loonie
Michael Babad

This article was published more than 6 years ago. Some information may no longer be current.

Briefing highlights

  • What analyst say about NAFTA talks
  • Thomson Reuters near F&R deal
  • Markets at a glance
  • Toronto home prices forecast to rise
  • Metro boosts dividends
  • Amazon, Berkshire JPM partner on health care
  • Europe’s economies bounce back
  • What to expect from Trump address
  • What else to watch for today

NAFTA's fire and ice

Observers are applauding the more conciliatory tone of the latest round of NAFTA talks, but note there's "still plenty of ice" and that the comments from America's top trade official are off-base.

Of course, these are negotiations, and you'd expect hard bargaining and rhetoric, which Foreign Minister Chrystia Freeland downplayed.

But in some ways, these attempts to overhaul the North American free-trade agreement are, um, looney. Or loonie, as the case may be.

And the uncertainty created by all this, including President Donald Trump's threats to kill the deal if he doesn't get a fair one, will weigh on business plans and have, to date, roiled the Canadian dollar.

"Freeland is right to say don't make too much of individual pieces of rhetoric," said Brett House, Bank of Nova Scotia's deputy chief economist.

"They made some progress," he added.

"They're still talking. There was talk of a step forward. The closing note was conciliatory. They are moving on toward another round of talks. And, most realistically, there are increasing acknowledgments all around that the talks will have to be extended beyond the never-realistic end-March deadline currently in place."

Bipan Rai, executive director of macro strategy at CIBC World Markets, agreed, noting market reaction, or lack thereof.

"Relations are thawing, but there's still plenty of ice," Mr. Rai said.

"The tone after the meeting was slightly better than the October round as all three parties indicated that some progress has been made on key issues, and that there will be a seventh round in Mexico in late February," he added.

"That was good enough for markets given that we'd been hearing just as much from the leaks over the weekend."

For his part, U.S. Trade Representative Robert Lighthizer stressed that "some real headway" was made in the sixth round of talks in Montreal, that the Trump administration considers the trade deal "a very important agreement," and that he hopes "progress will accelerate soon." So some optimistic comments, there.

Foreign Affairs Minister Chrystia Freeland looks on as U.S. Trade Representative Robert Lighthizer speaks at the closing of NAFTA meetings in Montreal on Jan. 29, 2018.

Of course, there's a long, long way to go, and you've got to remember the uncertainty surrounding U.S. trade policy, added Douglas Porter, Bank of Montreal's chief economist, who, like Mr. House and Mr. Rai, cited the good news that Canada, America and Mexico are still at the table.

"Above and beyond that, while there does seem to be some progress, most of the officials also stressed how complex the issues were, and/or the slow pace of progress," Mr. Porter said.

"So I don't think we are out of the woods by any means yet," he added.

"It's tough to say much more than that, given that even the public pronouncements have to be viewed through the lens of a negotiating stance, as well as through the lens that U.S. policy is somewhat unpredictable at this point."

Toronto-Dominion Bank chief economist Beata Caranci also pointed to comments from Ms. Freeland, who said there are still big divisions over some U.S. demands.

"Wait-and-see mode remains, which makes for a difficult business investment climate for those with significant cross-border ties," Ms. Caranci said.

Observers also took Mr. Lighthizer to task over some of his comments and demands, notably the American rejection of Canada's bid to break a stalemate over auto content requirements.

As The Globe and Mail's Adrian Morrow and Greg Keenan report, Mr. Lighthizer said the Canadian proposal would mean less North American content, and the loss of jobs on both side of the border.

He also criticized Canada for taking the U.S. to the World Trade Organization with a broad complaint over trade practices.

"The big caveat was Lighthizer's comment on Canada's auto proposal being 'counter-productive,'" Mr. Rai said.

"That's contrary to the leaks over the weekend that the U.S. was pleased with Canada's plan on autos," he added.

"Additionally, Lighthizer took aim at Canada's good surplus with the U.S. by pointing out that it was equivalent to 5.8 per cent of Canadian GDP. Of course, he didn't mention that it equates to a very small deficit for the Americans when compared to U.S. GDP, and he downplayed the role of services trade (which shows that trade is actually far more balanced between the two countries)."

Scotiabank's Mr. House also cited some of Mr. Lighthizer's comments, notably the slap against the WTO action, which the U.S. trade rep said was unprecedented and a "massive attack" on American trade laws.

"It's not unprecedented in either its approach or its scope: The challenge that Canada launched appropriately cites cases that involve other countries in order to build a set of precedents to challenge U.S. countervailing and anti-dumping methodologies."

Not only that, Mr. House took issue with Mr. Lighthizer's comments on regional content in autos.

"The Canadian plan, as it has been reported to me, would at a minimum hold regional content constant, but more likely than not increase," Mr. House said.

Nontheless, Mr. House said the focus now should be on the fact that the three countries are citing progress.

"That's what this round needed to do: generate some goodwill and progress."

As for the currency markets, "what's key is that the negotiations extend beyond the end-of-March deadline and that the dialogue remains constructive," said Mr. Rai.

"If that doesn't happen, then there's a risk that the NAFTA termination premium could rise in all three currencies (CAD, MXN and the USD," he added, referring to Mexico's peso and the Canadian and U.S. dollars by their symbols.

Carlos Capistran, the Canada and Mexico economist at Bank of America Merrill Lynch, agreed these are likely to be "bumpy and lengthy negotiations, meaning we expect more posturing down the road, especially before each new round, and talks to be extended for months, which will keep the CAD and MXN volatile and continue to delay investment."

The Canadian dollar is above the 81-cent (U.S.) mark today.

While the loonie and the peso "strengthened mildly" on the NAFTA news, the Canadian dollar could only go so far "as many key issues have yet to be resolved," said Sue Trinh, Royal Bank of Canada's head of Asia foreign exchange strategy in Hong Kong.

"The various press conferences indicated that the biggest differences are over various U.S. proposals, with disagreements on key measures such as autos, appropriate trade benchmarks to measure deficits and the sunset clause yet to be resolved."

Interesting, too, CIBC's Mr. Rai said, markets are "far more sensitive" to what Mr. Trump says than the comments of certain other officials such as Mr. Lighthizer.

Which puts the focus on the president's State of the Union address tonight.

"Past that, NAFTA will likely take a back seat until late February and the CAD should continue to take its cue from macro trends - including those influencing the U.S. dollar."

Read more

Thomson Reuters nears deal

Thomson Reuters Ltd. is close to a deal to sell a chunk of its financial and risk operations to private equity giant Blackstone Group LP.

Thomson Reuters confirmed today that it's in "advanced discussions" with Blackstone aimed at a "potential partnership" in the division.

"As part of any proposed partnership, Thomson Reuters would retain a significant interest in the F&R business and would retain full ownership of its legal, tax and accounting and Reuters News businesses," it said.

Reuters reports that the deal for control of the unit could go for more than $17-billion (U.S.).

Read more

Markets at a glance

Read more

Europe bounces back

Europe’s economies are bouncing back from their long slump.

The euro zone economy expanded in the fourth quarter of last year by 0.6 per cent, bringing annual growth to 2.5 per cent.

That marks the best showing since before the financial crisis and Europe’s years of struggling with debt.

What to watch for today

Mr. Trump's State of the Union address tonight will be his first.

And, despite what he's going to say, many in America believe it's a fractious union after a year of divisive policies and comments.

"The themes of the speech are likely to reflect those emphasized throughout his first year in office, with special emphasis on America First principles highlighted at the recent Davos, Switzerland, World Economic Forum," said Citigroup economist Dana M. Peterson.

U.S. President Donald Trump speaks at the White House, in Washington, on Jan. 29, 2018.

The President can boast of a tax overhaul and his fight against what he sees as trade abuses, Ms. Peterson said, with goals including infrastructure spending, border security, immigration reform, more deregulation, and keeping up the trade fight.

Read more

More news

Streetwise

Insight

Inside the Market

In case you missed it