Wednesday, September 26, 2018

The bully is paying more and more for his bad behavior

Trump is threatening to leaving Canada without a NAFTA deal. Then Morgan Stanley predicts that without NAFTA, the Canadian Dollar should drop by 10% against the U.S. dollar from current levels and (my interpretation) it would probably drop against other currencies as well. The U.S. Fed is about to raise interest rates again, if the BOC abstains that may lower the Canadian dollar even further.

Think what that may mean:  Oil prices in U.S. dollars are near a 4 year high and likely to rise even more. In Canadian dollar terms that translates in a lot higher oil AND gas prices for Canadian producers. Say the dollar drops by 10 to 15% against the U.S. dollar that would mean that nearly half of the oil and gas price discounts ‘disappear’, even without pipelines. That discount would be reduced even further if Line3 and later on Keystone and possibly even TSM are actually completed (starting in 2019 and stretching out until 2021). 

On top of that, Canadian prices for autos and parts fabricated in Ontario would fall in terms of U.S. dollars and imagine the boon for Tourism and Canadian Real Estate investments. Sure, Trump will need to imposed tariffs on U.S. cars and parts but they are offset by the fall in the Canadian dollar.  Also companies like Magna produce already a lot of those parts in the U.S. and Mexico and their Canadian revenue may be much less affected these tariffs and benefit from more competitive prices overseas in e.g. European sales from Canada.

Then Trump the Buffoon has a significant fight ahead for getting Congress and the Senate on side to leave Canada from the new NAFTA agreement. I am not sure but I would be tempted to say to Mr. Trump: “Bring it on”.  In the meantime, the U.S. gets more and more hurt by its trade wars with other trading partners. I wonder if the U.S. consumer will remain so confident when they have to pay higher and higher prices for the goods they are consuming (68% already live from paycheck to paycheck) and I am pretty sure they don’t make enough to offset this with no-longer-existing U.S. manufacturers. Canadians in the mean time will have to pay more and more for U.S. imports – likely we will purchase elsewhere without being impeded by U.S. tariffs. 

What will likely happen is that the U.S. consumer and voter will become seriously disgruntled with Mr. Trump while the rest of the world laughs him out of the U.N. It may spell out a short term doubtful boost for Trump and allies in the upcoming November elections but long term his support, already low, will likely fall even further. Maybe even a one-term Trump – we can always dream. The only bad news is that Justin may look like a hero instead of the zero he is. Alas, we can not win every battle.

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