The Canadian dollar could tumble as much as five per cent with the termination of the North American Free Trade Agreement, one currency strategist predicts.
The loonie was up 0.34 cents to 80.30 U.S. cents as of the end of Monday's trading day, but Rahim Madhavji, president and currency strategist at Knightsbridge FX, said if NAFTA ends abruptly, there would likely be an immediate three to five per cent drop in the currency’s value.
However, if there’s a more “simmering” pullout from the deal, he sees a slower decline in the dollar.
“I think we are going to see a little bit of weakness in the loonie and I think it’s primarily going to be driven by the headlines that come out,” Madhavji told BNN in an interview Monday.
“The loonie has had a pretty strong run over the last couple of months – and I think there’s a little bit more of a risk that if the NAFTA negotiations don’t go as well, or someone pulls out, we could see a rapid deterioration in the loonie,” he added.
Madhavji says while he sees downward pressure on the loonie in the short-term, his longer-term outlook for the Canadian dollar is positive due to the country’s strong economic environment.
Alex Lane, portfolio manager at Dynamic Funds, also said NAFTA uncertainty could lead to a weakened loonie. But as he invests in U.S. stocks, he’s not hedging his Canadian dollar exposure as a lower loonie would boost returns when bringing money back from the U.S.
“If there’s any adverse event that goes on in these [NAFTA] negotiations that’s negative for Canadian trade with the United States, the best way the market can reflect that is by hammering on the Canadian dollar – readjusting the currency to account for lower trade, lower economic growth, so on. And you’ll see that adjustment happen fairly instantly,” he told BNN.
The sixth round of NAFTA negations got underway in Montreal Sunday and will wrap up on Jan. 29.