By Michael O’Neill Agility Forex, Senior Analyst.
Canadian’s are now playing in a high stakes poker tournament. They didn’t need to qualify either. They got a seat at the table when America voted for Donald Trump.
A cornerstone of Canada’s economic growth since 1993, has been the North America Free Trade Agreement. That agreement is in jeopardy. CNN reported on November 16 that reshaping of America’s trade policy begins on Day 1.
That will mean a revival of softwood lumber disputes between the US and Canada. The existing softwood lumber deal expired October 12, 2015 and the deadline to negotiate a new deal has passed. In July, twenty-five senators sent a letter to US Trade Representative Michael Froman. They alleged “that Canada lumber is subsidized, unfairly traded and has decades’ worth of well-documented adverse economic impacts in the US. The US contends that Canadian forestry companies have an unfair advantage over their American counterparts because the Federal government owns most of the forested land and gives Canadian companies access at below market rates. The argument started in the 1980’s and has never gone away despite the World Trade Organization (WTO) ruling in Canada’s favour on a couple of occasions.
Mr. Trump and his team will be all over this issue like bark on a tree.
There are plenty of beef issues to beef about. Canada, the US, and Mexico have been at odds over American meat labeling issues.
What’s the beef? The American’s insist that foreign beef and pork must have labels giving its origin. The American’s also insist that feedlots keep Canadian livestock and meat separate.
Beefing about beef is another US trade issue. Photo: Shutterstock
The problem is that the American’s demands are a form of protectionism and violate international trade law, according to the World Trade Organization. In December 2015, the WTO awarded Canada the right to seek $1.0 billion in trade sanctions against the US.
It is fair to say that most American’s don’t care very much about labels on Canadian beef and won’t be bothered if Canadian steaks are not available in their supermarkets.
Canadians may have a different reaction. They will be devastated. The Globe and Mail reports that exports make up 70% of the domestic beef industry which accounts for 228,000 jobs (directly and indirectly). The beef issue is another easy way for Donald Trump to fulfill campaign promises on trade without the risk of any domestic economic disruption.
Last week, Prime Minister Justin Trudeau said “if American’s want to talk about NAFTA, I’m more than happy to talk about it”. Canadian’s should be very scared.
Donald Trump is an accomplished billionaire businessman, author of “The Art of the Deal” and a graduate of the Wharton School of Finance. Justin Trudeau is a drama teacher. He has spent more time in school than he has working. Trudeau negotiating with Trump would be akin to a crippled impala among a pride of hungry lions. It wouldn’t be pretty.
A Canadian light-weight vs. an American heavy-weight Source: IFXA
Donald Trump campaigned on making American energy independent. That probably didn’t go over very well in the Vienna offices of Opec. But they have the advantage. Iran, Iraq and Saudi Arabia have huge oil reserves and can produce a barrel of crude far cheaper than America. Russia is also in that group, although not an Opec member. It is in Opec’s best interest to ensure that the price of crude remains low enough to deter an aggressive expansion of the US oil market. If it is bad for America, it is worse for Canada.
Source: Wall Street Journal
A report in the Wall Street Journal says that it costs Canadian energy firms $26.64 to produce a barrel of crude. In the US, that number is $23.35 for shale and $20.00 for non-shale. In addition, Western Canada Select Crude trades at a discount to WTI, which on November 16 was $15.30. On that day, WTI closed at $45.81 while WCS closed at $30.51.
Chart: Comparison WTI VS WCS
The risk that oil prices stay below $50.00/barrel will be another blow to the Canadian economy. The Bank of Canada is already concerned about the slow domestic growth rate and the governor admitted that a rate cut was discussed at October 19th meeting.
Donald Trump’s anti-NAFTA rhetoric, the lack of sustainable upside movement in oil prices, a doveish leaning Bank of Canada and the 94% chance of a US rate hike in December have put the Canadian dollar on the defensive. If Mr. Trump slaps new tariffs on lumber and ignores the WTO label ruling, the Canadian dollar, a 70 cent Loonie is a real possibility by in the first quarter of 2017.
In this poker game, the stakes have risen dramatically. Canada already owns the short stack and that stack just got shorter.