The Canadian dollar has ticked lower in the Friday session. Currently, USD/CAD is trading at 1.2715, up 0.05% on the day. On the release front, there are no major indicators. Canada releases Corporate Profits, and the US will publish manufacturing and services PMIs.
Janet Yellen is winding up her term as head of the Federal Reserve, with Jerome Powell taking over in February. Yellen has consistently said that she expects inflation levels to pick up, but earlier in the week she admitted that she is "very uncertain" about this, adding that she and other Fed policymakers are not sure if low inflation is transitory. Wage growth has also been lackluster, despite the labor market being a full capacity. Despite the lack of inflation, investors expect a rate hike in December, and up to three rate hikes in 2018. The markets have priced in a December hike at 91%, and the odds of a January raise are at 89%.
Although few would argue that the NAFTA trade agreement has benefited the economies of the US, Canada and Mexico, the agreement could be in trouble. A fifth round of talks over NAFTA failed to lead to significant progress, prompting the US to send an ominous warning to Canada and Mexico. The US wants to raise the North American content of vehicles from 62.5% to 85% and require that 50% of content come from the US. As well, the US wants to put restrictions on Canadian and Mexican agriculture. Unsurprisingly, Mexico and Canada have rejected these proposals. Negotiators are hoping to wrap up a new deal by March 2018, but the US chief negotiator warned that "absent rebalancing, we will not reach a satisfactory result". The uncertainty over NAFTA could weaken confidence in the Canadian economy, and may lead the Bank of Canada to delay rate hikes while the negotiations continue.
