It was May 13, 1985. The USDCAD exchange rate was 1.3755 or 72.7 Canadian cents for 1.00 US dollar and British rock band Dire Straits released “Money for Nothing,” written by Mark Knopfler. Prime Minister Brian Mulroney and US President Ronald Reagan were still beaming from the success of the “Shamrock Summit” two months earlier, where they were televised singing a duet of “When Irish Eyes are Smiling.” Three years later, the Canada-United States Free Trade Agreement was signed. (FTA)
Thirty-three years later, Dire Straits got inducted into the Rock and Roll Hall of Fame in April. Instead of a “Shamrock Summit, the Canadian and US leaders attended a G-7 meeting in Quebec. The leaders didn’t croon duet, they traded insults.
On June 10, US President Donald Trump accused Canadian Prime Minister Justin Trudeau of making “false statements.” The President was peeved at what he perceived as Trudeau’s grandstanding during a G-7 press conference in front of his “home” audience.Trump accused the Prime Minister of being “meek and mild” in face-to-face meetings and then talking tough behind his back. He was so angry that he refused to sign the G-7 communique. He continues to threaten to rip up the North America Free Trade Agreement and is negotiating in bad faith by levying tariffs on a bevy of Canadian imports.
It’s a tit-for-tat spat. The United States slapped 25% duties on imports of Canadian steel and 10% on aluminum effective July 1. Canada retaliated with tariffs on $16.6 billion worth of US imports which include taxes on US steel, and aluminum as well as peanut butter, whiskey, and maple syrup, to name a few.
The Canadian retaliation irked the thin-skinned “leader of the free world.” He set his sights on Canada’s dairy industry saying it charges 270% tax on US imports. He has a point. The problem is that Wisconsin produces more milk than every Canadian dairy farm combined. They would flood Canada in milk and wipe out an entire industry. So much for the President’s belief of “Fair trade not Free trade.”
President Trump is preparing to go nuclear, citing national security. He is threatening to put a 25% tariff on all auto imports. The Office of the United States Trade Representative reports $51 billion worth of vehicle exports to Canada, while importing $56.0 billion of vehicles from Canada .On June 18, TD Bank economists predicted that if Canada and the US traded auto tariffs, it would bring domestic economic growth to a standstill. It would have severe repercussions to Ontario where potentially, 1 in 5 jobs would be lost.
Domestic issues aside, the Canadian dollar is vulnerable to international developments. The US has picked trade fights with the European Union (EU) and China. The EU announced 25% tariffs on €2.8 billion worth of US products including Harley’s and Levi’s and go in effect on June 22.
The China fight is nasty and getting nastier. China has responded to US tariffs with tariffs of their own. President Trump keeps upping the ante. On June 18, the President ordered the US Trade Representative to find another $200 billion worth of Chinese imports to tax, if China matches earlier US tariffs. China, call it a trade war. Trade uncertainty is disruptive to global financial markets, and investors search for safe-haven assets. The Canadian dollar is not one of them.
The outlook for the Canadian dollar is grim, and a return to the May 13, 1985 exchange rate level is a strong possibility, perhaps even before the end of the summer.
USDCAD peaked at 1.4690 on January 18, 2016. It had been in a downtrend until a couple of weeks ago, when prices broke above the 1.2970-1.3060 resistance zone. The subsequent climb through resistance at 1.3125 (the 2018) peak has opened the door to further gains. Soon, Canadian’s may be spending Loonies like its 1985.
If Mark Knopfler updated his lyrics for a Canadian audience today, they might say “Yer Money’s Worth Nuthin’ When Yer Trade Ain’t Free.”
