U.S. Midterms: What the Blue wave means for Canada
The desk argues that the potential outcomes of the U.S. midterms, particularly a Democratic majority, could reshape U.S.-Canada relations concerning trade and tariffs. Per the full note by RBC Royal Bank, the midterms may catalyze negotiations for a deal by year-end, although any agreement is likely to maintain managed trade conditions, particularly with tariffs remaining an enduring issue. These dynamics could impact Canadian exports, particularly in the auto sector, as Canada may accept automotive tariffs in exchange for other concessions. Amidst this backdrop, traders should be alert to the evolving landscape of U.S.-Canada trade policy as it can have significant implications for the CAD/USD pair.
What the desk is arguing
The desk believes that the midterms may significantly influence the trade policies between the U.S. and Canada. Based on the RBC analysis, outcomes of the elections could drive the Biden administration toward negotiating an end-of-year trade agreement with Canada.
This focus on trade could result in Canada absorbing tariffs on its auto exports as part of a broader negotiation strategy. The implications are clear: managed trade may become the norm, ensuring that tariffs will likely extend beyond Trump's presidency. This is a notable shift from previous renegotiations and reflects an increasingly complex and intertwined economic relationship.
Where it sits in our coverage
Our current consensus target for CAD/USD is 1.075, with a range projected between 1.04 and 1.12. Specific firms contributing to this include: - jpmorgan with a target of 1.10 for Mar26 - bofa with a target of 1.04 for Mar26
The desk's perspective aligns closely with jpmorgan's outlook, suggesting a stronger CAD in light of favorable negotiations, while diverging notably from bofa's more cautious stance at the lower end of the range.
How other firms see it
Firms aligned with the desk include jpmorgan, seeing the likelihood of a relatively stronger CAD if trade negotiations proceed positively. Meanwhile, bofa expresses a more bearish view, advocating caution in light of potential trade tensions.
In parallel to this, traders should keep an eye on the USD/CAD currency pair's trajectory, as movements here are likely to reflect shifts in U.S. policy towards Canada amidst an evolving economic landscape. Also noteworthy are broader geopolitical considerations that could intersect with trade policies.
What the calendar says
No significant calendar events are scheduled that might directly impact U.S.-Canada trade negotiations in the next 30 days. This absence of immediate catalysts suggests that the focus will squarely remain on the aftermath of the midterm elections and any resulting policy shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Yes, the U.S. midterms may accelerate trade negotiations between the U.S. and Canada.
- 02Any agreements reached could result in enduring tariffs, particularly affecting the automotive sector.
- 03Traders should monitor CAD/USD movements closely as they will reflect outcomes from these negotiations.
- 04The political landscape in the U.S. is set to impact Canada's economic strategy moving forward.
Market implications
Watch for movements in the CAD/USD pair as negotiations unfold; if tariffs are applied or alleviated, it could impact market sentiment significantly. Indicators from trade negotiations will be crucial for understanding the CAD outlook in the coming weeks.
Risks to this view
If the negotiations falter or tariffs remain unchanged, a bearish outcome could materialize for the CAD. Shifts in U.S. domestic policy or renewed trade tensions could also lead to a rapid reevaluation of CAD/USD positioning.
RBC Royal Bank View Online Dear Brian In our latest briefing, Global Issues Policy Lead Thomas Ashcroft writes on how the U.S. midterms could impact the fractured relationship between the two nations—on trade, energy and defence. Here is a snapshot: - The result could accelerate talks to push for a deal by year-end - Any deal will be managed trade, and tariffs will likely outlast Trump - Canada may have to accept tariffs on autos in exchange for other concessions Read the full briefing We encourage you to share this message with your network and ask them to join our mailing list to get in-depth research on the big ideas that can drive Canada’s economic prosperity. - Please do not respond to this email as this inbox is not monitored. You received this email because you subscribed to RBC Thought Leadership.
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