U.S. President Trump's announcement last week that the United States will not renew the USMCA trade deal wasn't especially surprising, said Rosenberg Research.
The agreement would remain in force until 2036, but the decision would trigger annual review periods, and it fits neatly within the U.S. administration's broader strategy of maximizing negotiating leverage, noted Rosenberg Research.
USMCA is proceeding with a mandatory joint review, starting this July. The USMCA talks so far are showing minimal progress, with U.S. officials framing Canada as non-responsive. Changes to rules of origin, and specifically questions about the Chinese content of goods, have been a major theme of the negotiations.
With their USMCA-compliance exemptions shielding them to some extent from the Section 301 tariffs, Canada and Mexico continue to have a competitive advantage relative to most other exporters in the U.S., providing some insulation from U.S. trade policy volatility.
However, there are still vulnerabilities, stated Rosenberg. A U.S. refusal to renew the deal would leave the USMCA in force, but the reversion to an annual, rather than six-year, review process, and the exposure to mercurial swings in U.S. trade policy, would also present a sustained overhang that would weigh on international direct investment and domestic investment trends in Canada, with potential spillover effects on trade and employment.
Canada's economy remains cyclically battered by the events of the last year and a half, along with poor structural growth to begin with. Jobs data has been volatile, with the May numbers showing a drop in unemployment from 6.9% to 6.6%, but the employment growth trendlines have been very poor over the last year, pointed out Rosenberg.
For Canadian assets, the new reality is clear. Rosenberg expects some heightened market sensitivity for the Canadian dollar, and in particular, there is a "skew" to the potential market moves.
Sudden setbacks in the negotiations will cause downside jumps in the loonie, while any gains will be incremental, according to Rosenberg.