Lonnie Bullish Forecast Turned to Bearish After the Rate Hike; NAFTA Worries Weigh

Written by Posted On Thursday, 18 January 2018 14:39

Although odds for the rate hike were significantly higher and investors were expecting bullish run from the Canadian dollar after the rate hike, the market has witnessed adverse reaction for the USD/CAD pair. The USD/CAD pair initially declined according to traders expectations and led the Canadian dollar to rise over the major counterparts; it has upturned the path after concerns related to NAFTA trade deal and the potential impact of lower corporate taxes on the United States. You can check the latest exchange rate on Knightsbridge Foreign Exchange

Some of the Traders were already expecting the Bank of Canada to adopt a cautious stance for the future rate hikes, as the NAFTA deal continues to threaten Canadian economy.

The Bank of Canada said, “Uncertainty surrounding the future of the North American Free Trade Agreement is clouding the economic outlook.”

The Bank further added, “The Bank’s outlook takes into account a small benefit to Canada’s economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgment on business investment and trade.”

Consequently, despite the rate hike, the North American Free Trade Agreement threat and economic outlook send the loonie currency rate lower.

How NAFTA Would Impact World and the Canadian Economy?

Although it is difficult to predict the exact impact of the cancellation of the NAFTA deal on the world and Canadian economy, analysts and the Bank of Canada have shown strong concerns. The Central Banks expects the cancellation of NAFTA trade deal to create a significant volatility on the Canadian economy.

Poloz and Senior Deputy Gov. Carolyn Wilkins likewise said that ending Nafta would likely have a net negative impact for both the U.S. what's more, Canada, yet that the impact was difficult to measure, particularly regarding the long haul consequences for corporate interest in Canada. They included that the impacts would differ from part to segment also.

“Any number of risks could easily materialize to prevent the Bank of Canada from hiking more aggressively, including -- ironically -- that the bank tightens too quickly in the first half of 2018 and ends up straining a highly indebted household sector,” said Ben Homsy,

The trade deal between two countries generates almost 32% of the GDP for Canadian economy. Therefore, any alteration to the deal could have higher than expected impact on the Canadian economy. Analysts suggested the Canadian government to make initiatives to reduce the potential loss.

The Nafta talks in which Mexico, Canada, and the U.S. are endeavoring to renegotiate the 24-year old exchange agreement have added to instability in its individuals' monetary standards over the previous months, albeit a large portion of the impact was outstanding in the Mexican peso. The Mexican peso has been hit the hardest on numerous occasions, as a conclusion to the exchange bargain is required to hit Mexico most.

There may be fewer rate increases than expected in 2018

The odds for the more rate hikes are declining since the BoC presented bearish outlook for the Canadian economy, amid NAFTA trade deal and U.S. tax reforms.  Therefore, looking at the uncertainty surrounding the trade negotiations, the BoC is likely to expand accommodative monetary policy to maintain the economy in a healthy position and to keep the inflation within the target. Therefore, analysts have reduced their expectations for the rate hike.

In Conclusion

After trading sideways in Wednesday trade, the loonie exchange rate dipped in early Asian trade on Thursday, showing traders concerns over the dovish BoC stance. Therefore, Canadian dollar is likely to remain soft in the days to come, due to concerns over the NAFTA trade deal.

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