By Michael O’Neill
“Loose lips sink ships.” The phrase is an American idiom coined in World War II. It was plastered on posters all over the country to alert soldiers and civilians to the dangers of talking about secret information. The Government of Canada should order a dozen or more of the items and hang them in the offices of every Cabinet member with two or three posters hung in Foreign Affairs Minister Chrystia Freeland’s office.
Ms. Freeland precipitated a diplomatic crisis with Saudi Arabia when she took a page out of President Trump’s playbook and tweeted national policy. President Trump tweets to his 52.7 million Twitter base to bypass the US media, as he believes many outlets are rabidly biased against him. Ms. Freeland doesn’t have such issues. She is a reigning Liberal Cabinet Minister in a government that is viewed with rose-coloured glasses by most of the Canadian media.
On August 2, her tweet supporting an imprisoned Saudi citizen outraged Saudi Arabia. They responded with a tweet of their own, saying “The Canadian position is an overt and blatant interference in the internal affairs of the Kingdom of #SaudiArabia and is in contravention of the most basic international norms and all the charters governing relations between States.” On August 6, they replaced words with action. They expelled Canadian Ambassador Dennis Horak, giving him 24 hours to “get out of town.” Then they put their money where their outrage was. Saudi Arabia froze all new business and investment transactions with Canada, cancelled all flights by the Saudi airline (effective August 12), recalled 7,000 Saudi students, and told grain suppliers that it would not buy Canadian wheat and barley. A $15 billion armored car contract is up in the air. In addition, the Financial Times reported that the Saudi central bank and pension funds were ordered to dump Canadian assets “no matter the cost.” The Canadian dollar lost 1.2% of its value against the US dollar between Tuesday and Wednesday.
Chyrstia Freeland official response to the Saudi’s was to say “We are deeply concerned that Saudi Arabia has expelled Canada’s ambassador in response to Canadian statements in defence of human rights activists detained in the kingdom. Canada will always stand up for the protection of human rights, including women’s rights and freedom of expression around the world. We will never hesitate to promote these values, and we believe that this dialogue is critical to international diplomacy.”
The diplomatic row has put a negative outlook on the Canadian dollar. The currency was basking in glow of robust economic data, the prospect of a Bank of Canada (BoC) rate hike in September and bearish USDCAD technicals. Prices dropped on in the morning of August 6, and bottomed out at 1.2962 in early Toronto trading on Tuesday. The Financial Times article suggesting that Saudi Arabia was dumping Canadian assets drove USDCAD to 1.3120. The Loonie enjoyed a brief recovery on August 8 on positive US/Mexico trade talk developments.
The outlook for the Canadian dollar is mixed thanks to the Saudi dispute and the Nafta talks. The downtrend from the June peak of 1.3375 is intact while prices are below 1.3200. However, the uptrend line from the end of January is intact above 1.2960 which coincides with a Fibonacci support level of the January-June range. As long as prices are above this level, USDCAD will target the 1.3400 area.
Mexico and the United States met last week to discuss the auto component of the trade agreement. Canada was not invited to the talks, and its request for an invitation was rejected. On August 8, Bloomberg News reported that the US and Mexico would reach an agreement on autos by the end of the week clearing the way for another round of Canada, US and Mexico talks as early as next week.
If the US and Mexico have reached a deal on autos, is Canada just supposed to accept it? Will the US use the Mexico deal as leverage to extract concessions out of Canada? Ms Freeland is adamant that Canada will not sign an agreement if it expires after a specific term (sunset clause) or if it doesn’t allow for third party dispute resolution. President Trump is just as stubborn about wanting the ability to renegotiate. The Canadian dollar is still vulnerable. If “loose lips do sink ships,” they also sink trade agreements.
