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Canadian Dollar Plunges on Fed Rate Hike, NAFTA Uncertainty

September 26, 2018 at 18:45 by Andrew Moran

Canadian 20-dollar billsThe Canadian dollar is plunging midweek after the Federal Reserve raised interest rates and on growing uncertainty regarding a new North American Free Trade Agreement (NAFTA). Without any upcoming Canadian economic events, traders will look ahead to key US numbers later this week.

On Wednesday, the Federal Open Market Committee (FOMC) voted unanimously to boost a key US interest rate by a quarter-point, from 2% to 2.25%, the highest level in a decade. The Fed is anticipating one more rate hike in December and then three more in 2019.

Fed officials also revised its forecast for US economic growth in 2018 from 2.8% to 3.1%. The central bank does expect the gross domestic product (GDP) to slow down to as low as 1.8% by 2021.

The market was surprised by the Fed removing a certain phrase from its monetary policy statement: “remains accommodative.” This suggests that the Fed might put the brakes on rate hikes at anytime following an assessment of its actions on the national economy.

Meanwhile, the loonie continues to be sensitive on NAFTA, especially with US trade negotiators warning Ottawa that it is running out of time. While Washington and Mexico continue to pressure Canada into joining a new trade pact, a series of deadlines have passed without any significant results. And that might be bad news for the Canadian economy since it sends 75% of its exports south of the border.

Speaking in New York with reporters, following the United Nations General Assembly, Prime Minister Justin Trudeau revealed that President Donald Trump has reassured him “a few times” that the US would end its push for tariffs if the three parties successfully renegotiate NAFTA.

One of the things in my many conversations with President Trump on the issue of 232 tariffs writ large and, indeed, specifically was his insistence that while if we renegotiate NAFTA, if we get to a NAFTA deal, there will be no need to worry about these other things. That has been something that he has said a few times.

This comes a day after US Trade Representative Robert Lighthizer told a press conference that both Canada and the US had “still a far amount of distance” between them on trade.

There are a number of significant issues between us… I think Canada wants to do it, I know we want to do it, and we’ll see what happens. We’re sort of running out of time.

Later this week, Bank of Canada (BOC) Governor Stephen Poloz will deliver a speech and the US will publish its final GDP and durable goods orders reports.

The USD/CAD currency pair surged 0.39% to 1.3005, from an opening of 1.2983, at 18:28 GMT on Wednesday. The EUR/CAD spiked 0.38% to 1.5300, from an opening of 1.524.

If you have any questions, comments, or opinions regarding the Canadian Dollar, feel free to post them using the commentary form below.

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