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USD/CAD. NAFTA is bursting at the seams, the Canadian dollar is getting cheaper

The US dollar continues to strengthen its position: after the" hawkish " meeting of the Fed, very good macroeconomic data were published today, which indicate the strength of the US economy. The greenback to some extent dominates all dollar pairs, including the pair with the Canadian dollar.

However, the Canadian dollar has been cheaper since last Friday, responding to the failed attempts of negotiations between Ottawa and Washington. For the second year, the parties have been trying to renegotiate the North American Free Trade Agreement (NAFTA), but all these attempts have not been successful so far: moreover, in recent years, the dialogue between the two countries takes place in an atmosphere of mutual accusations from Trump and Trudeau.

Yesterday, the US president aggravated the situation, saying that the US side can not find common ground in negotiations with Canada, and in general, the Canadians "behave very badly." He also said that he refused the Canadian prime minister a personal audience (although later the official representative of the Canadian Ministry of Foreign Affairs said that Trudeau did not initiate the issue before Trump). In general, the US President made it clear that relations between the two countries leave much to be desired, and all optimistic expectations regarding the conclusion of the deal were in vain. Given this fact, it is not surprising that Trump again began to speak the language of threats and ultimatums: he reminded reporters that Washington intends to impose duties on imported cars and auto parts from Canada, if Ottawa does not sign a trade agreement. In other words, he put an ultimatum to his northern neighbor – or NAFTA on the terms of the United States or the US imposes duties on imported cars.

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It is worth noting that the President of the United States has been warning the Canadians of such an alternative for months now. But then it gave the negotiators the opportunity to continue the dialogue – and a few weeks ago the parties were literally on the verge of a compromise. But the deal fell through again, and Trump again declared an unfair attitude towards his country, threatening to break the deal and impose duties.

Experts warn that you should not underestimate the threat of the US president – he is not only able to take this step, but can also do it suddenly. According to them, Trump is held back by the Congressional elections, which will take place on the 6th of November. He himself at the beginning of the summer said that no "decisive action on this issue will be taken before the elections." This is logical: not all Americans share the view of their president that Canada is a "bad and dishonest neighbor." Such rhetoric could have resonated with Mexico, while the Canadians have a slightly different "image", so to speak. Therefore, the final rupture of the former trade relations between Ottawa and Washington is likely to happen in late autumn (although this can not be said with certainty, given the impulsiveness of the head of the Oval office).

By and large, in the context of the foreign exchange market, it is not so important when Trump decides to take this step. The very fact that the parties cannot agree puts significant pressure on the Canadian dollar. As experts have repeatedly noted, if Washington implements its threats, it will be a tangible blow to the Canadian economy. The automotive industry of this country mainly consists of car assembly plants of a number of auto giants – Toyota, Honda, Ford and some others. In total, Canadians export more than 70% of the cars produced in the country worth about $50 billion to the United States. Therefore, if the US president introduces new duties, this step can have wide consequences, up to the recession of the economy.

Even the active growth of the oil market remains beyond the attention of USD/CAD traders. The "loonie" is focused on NAFTA, as the future of the interest rate largely depends on this issue. More recently, traders were almost certain that the Bank of Canada before the end of the year will once again return to this issue and will increase the rate for the third time. Now this possibility is questionable, as the Canadian central bank, along with" hawkish" hints, repeatedly warned that it is closely monitoring the situation with NAFTA. Therefore, any hints of the deal are considered by traders through the prism of this issue.

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Internal macroeconomic data also play a large role in determining the dynamics of the pair. Therefore, Friday's release may give impetus to an upward movement. We are talking about the Canadian GDP indicator, which fell to 2.4% in annual terms and to zero level in the month. According to the general forecast, tomorrow the release will not please the USD/CAD bears: the negative dynamics should continue as a decrease to 2.2% y/y and 0.1% m/m. If the indicator "dips" into the negative area in monthly terms, the pair will continue to grow - at least to the nearest resistance level of 1.3100 - this is the lower limit of the Kumo cloud on the daily chart.

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