USD/CAD: rumors about the death of NAFTA are greatly exaggerated

The Canadian dollar paired with the US currency on Wednesday tested the 29th figure, breaking a total of almost 200 points in three days. The downward impulse was triggered by positive rumors around the NAFTA negotiation process. Washington and Ottawa continue to discuss the terms of the renegotiation of the North American Free Trade Agreement. However, even today the mood of traders is not so optimistic: bears of the USD/CAD ahead of the event, celebrating an unconfirmed deal.

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Let me remind you that at the end of August, the United States concluded a trade deal with Mexico on the basis of the revised NAFTA terms. Canada has been virtually excluded from the negotiation process since mid-summer, so when the parties signed an agreement in a bilateral format, the Canadian dollar significantly slipped, falling in price in a pair with its American namesake almost to the middle of the 32nd figure. Nevertheless, the Canadians left the door open: Mexico advocated trilateral agreements, and the United States did not interfere with this idea. In early September, the parties almost came to a common denominator, but, according to rumors, the deal fell through because of one phrase that Donald Trump dropped in the presence of a journalist. He said that he was able to force Canada to make concessions, and the new agreement will be concluded entirely on his terms.

A loud phrase hit the front pages of newspapers, after which Canadian Prime Minister Justin Trudeau was forced to refuse to sign the deal. In the context of Trump's above position, any compromise by Canada would look like an act of betrayal of national interests. In turn, for Trudeau, who is preparing for the parliamentary elections next year, such a step would be too risky. As a result, the issue again hovered in the air: as noted by the negotiators themselves, they have a time frame until the end of the year – so the market did not expect any major breakthroughs before December.

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This background explains the reaction of traders to the recent statement of the minister of economy of Mexico, who unexpectedly reported that the chances of a deal between Washington and Ottawa in the near future has increased significantly. In addition, the press appeared with insider information about the concessions, which are still ready to go to Canada. There is limited access to the domestic dairy market. It should be noted that the influence of Canadian lobby groups in the field of dairy products is very huge. According to Canadian journalists, milk producers have a great influence in the structure of Canadian politics, so the prime minister has long feared to go into a confrontation with them, concluding a disadvantageous (for them) deal with Washington.

But apparently, the possible negative consequences of the absence of NAFTA and the possibility of a new trade war with the United States could convince Ottawa. At least, several sources reported on possible concessions from Canada, both in the Canadian press and in the American press. According to their information, having received the "welcome" in Ottawa, Canadian Foreign Minister Chrystia Freeland yesterday, came back to the United States to conduct final negotiations with the U.S. trade representative. Again, according to sources, the conclusion of the transaction is expected literally from day to day.

Against the background of such prospects, the USD/CAD pair fell to the boundaries of the 30th figure, but the bears could not break through the key level. The fact is that today there were quite discouraging comments from the Mexican economy minister, who just recently inspired the market with his optimistic statements. Now, he has changed the tone of his rhetoric, saying that Washington and Ottawa may not come to an agreement – in this case, the bilateral format of the transaction will work, although Canada's participation is "more preferable". In other words, he sowed a seed of doubt among traders, after which the growth of the Canadian dollar stopped.

The presence of intrigue on the eve of a possible deal will only strengthen the subsequent effect: a positive outcome of the negotiations will help the bears of the pair not only to gain a foothold in the 29th figure, but also to reach its foundation. If the parties take a pause again, the USD/CAD will return to the 31st level. However, in my opinion, the probability of reaching an agreement this time is very high, given the insider signals.

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If we talk about the technical picture, then a downward scenario is clearly looming. On the daily chart, the pair is between the middle and lower lines of the Bollinger Bands indicator, which indicates the priority of the bearish movement. The pair is also under the Kumo cloud, the Ichimoku Kinko Hyo indicator has formed a bearish "Parade of lines" signal. In favor of the South also speak and oscillators, which indicate the oversold pair. The main downward target for the pair is 1.2890, the lower line of the Bollinger Bands indicator on the weekly chart. But it is too early to talk about this: first, the bears need to gain a foothold in the 29th figure, before considering further downward prospects. The prospect of NAFTA negotiations in this context plays a key role.

The material has been provided by InstaForex Company - www.instaforex.com