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Get your loons in a row: ‘Investors should protect themselves against NAFTA termination risk’
Michael Babad

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

Briefing highlights

  • Investors should protect against NAFTA failing
  • RBC deemed too big to fail
  • How the Canada Revenue Agency blocked calls
  • Markets at a glance
  • What to expect in Quebec fiscal statement
  • What else to watch for today
  • Tencent tops Facebook in market value


Gimme shelter

CIBC World Markets believes negotiators will end up with something resembling a North American free-trade agreement, but that Canadian dollar investors should still take shelter.

"We endorse the view that investors should protect themselves against NAFTA termination risk given the level of complacency in the USD/CAD market," said Bipan Rai, CIBC's executive director of macro strategy, referring to the U.S. versus Canadian dollar.

"While we still think that some form [of NAFTA] will hold when the dust settles, the odds that negotiations become very contentious are still high," he added in a recent report.

"That implies that volatility should follow suit, as well."

As many observers have projected, including Mr. Rai in his report, the actual death of NAFTA would send the loonie into a tailspin, based on the expected impact on U.S. direct investment in Canada, which would slow, and the likelihood of a policy "pivot" by the Bank of Canada.

"The CAD market is not prepared for this type of adjustment at the moment given that positioning and sentiment still remain elevated in favour of the loonie," Mr. Rai said.

Mr. Rai isn't alone in warning that investors should be prepared because, given the Trump administration's warnings, the death of NAFTA is certainly a possibility. We may learn more today when the latest round of talks, which started last week, wrap up in Mexico City.

Even if something is salvaged, and many observers believe it will be, tensions will run high for some time yet as negotiators do what negotiators do.

The U.S., Canada and Mexico want it done by the time the second quarter of next year dawns. Remember, too, that Mexico holds elections in mid-2018.

"As such, rhetoric and speculation is likely to remain elevated throughout the negotiation process, potentially peaking in early 2018 (e.g., with the possibility of President Trump sending a letter of intent to withdraw from NAFTA to Congress)," said Brian Belski, chief investment strategist at BMO Nesbitt Burns.

"However, termination of NAFTA would hurt all three countries," Mr. Belski said, noting that the U.S. economy's export exposure is worth 3 per cent of gross domestic product, Canada's 18 per cent, and Mexico's 21 per cent.

"As such, ultimately we believe common sense will prevail and NAFTA will be renegotiated with relatively minor impact on Canadian equities," Mr. Belski added in a 2018 market outlook.

And, for that matter, it's not just the fate of NAFTA that investors have to consider.

"Politics continue to cloud the outlook for North American equities," said Bank of Montreal economist Carl Campus, referring to the debate over tax reform in the U.S.

"Meantime, NAFTA negotiations entered their fifth round [last] week while Canada looked to play a little hardball over the softwood dispute, challenging recently-announced U.S. import duties by requesting a NAFTA dispute resolution panel."

CIBC's Mr. Rai urged investors to prepare a plan.

"While we expect that cooler heads will prevail and that NAFTA termination will not follow through, we'd still advise caution for investors," Mr. Rai said.

"We're still a long ways away from the end of negotiations and the road can get a bit more bumpy along the way. The risk of a CAD selloff is high and the level of complacency is somewhat alarming."

So get your ducks in a row. Or your loons, as the case may be.

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RBC deemed too big to fail

Royal Bank of Canada has joined an elite list of 30 banks deemed too big to fail.

The Financial Stability Board said today it added RBC to the list of what it calls global systemically important banks, and removed another, Group BPCE.

The designation carries certain requirements for the banks on the list, which RBC already meets and which the FSB, a global body that monitors financial stability along with other regulators, also tweaked.

Others on the list include JPMorgan Chase, Bank of America, Citigroup, Deutsche Bank, HSBC, Barclays and Wells Fargo.

Canada's bank regulator, the Office of the Superintendent of Financial Institutions, said RBC must already meet its framework for such Canadian banks and that "these requirements are generally consistent" with those of the FSB.

"Consequently, RBC is well-positioned to meet the [FSB] requirements starting in January, 2019," it added.

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Markets at a glance

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What to watch for today

Quebec presents its fiscal update amid a stronger outlook.

"Expect good news with the potential for tax cuts to be announced," said Benjamin Reitzes," BMO's Canadian rates and macro strategist.

Quebec's economic performance is expected to go far beyond the assumptions in its last budget, added Bank of Nova Scotia's Mary Webb, who projects gross domestic product to expand 2.7 per cent this year and 1.9 per cent in 2018, with fast growth in employment.

"For [fiscal year 2018], April to August data indicate a $1.7-billion surplus compared with $995-million a year earlier," Ms. Webb said.

"The province's general fund own-source receipts over the five months are up 4.5 per cent year over year, while growth in program spending is a well-contained 3.3 per cent," she added.

"The government has indicated a desire to provide further tax relief for the middle class at midyear, following its elimination of the health contribution. For spending, education and health will remain prominent priorities."

Also on tap today is Federal Reserve chair Janet Yellen, who takes part in a moderated evening chat at New York University.

U.S. Federal Reserve chair Janet Yellen attents a meeting in Washington on Oct. 14., 2017.

"While a December rate hike is all but certain, her talk, as well as the minutes of the last policy meeting (on Wednesday), could indicate that members are becoming more comfortable with the inflation outlook in light of a recent uptick in shorter-term price metrics," said BMO senior economist Sal Guatieri.

And corporate earnings today include Campbell Soup Co., George Weston Ltd., HP Inc. and Lowe's Cos.

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