(Bloomberg) -- Canadian government officials say there’s an increasing likelihood U.S. President Donald Trump will give six-months’ notice to withdraw from NAFTA.
The officials, speaking Wednesday on condition they not be identified, declined to say whether they now think the likelihood of Trump following through on repeated threats to quit the pact now exceed 50 percent. The loonie fell along with Mexico’s peso and yields on Canada’s government bonds.
A White House official, speaking on background, said there hasn’t been any change in the president’s position on Nafta.
Trade relations between the two countries have taken a dramatic turn this week, with Canada escalating its trade spat with the U.S. by filing a World Trade Organization complaint over American duties against Canada and other countries. U.S. Trade Representative Robert Lighthizer responded earlier Wednesday, calling that move a “broad and ill-advised attack.”
Odds Bank of Canada Governor Stephen Poloz will raise interest rates at the meeting next week also declined to 82 percent on the news, from 87 percent Tuesday.
Trump withdrawing from NAFTA “was always a risk, but that risk is clearly more elevated now,” said Brian DePratto, senior economist at Toronto-Dominion Bank. “It’s hard to gauge how much credibility Poloz will assign to the types of reports we’re seeing today, but it does make it easier for him to maintain a holding pattern."
A sixth round of negotiations will begin this month in Montreal. Talks to overhaul the North American Free Trade Agreement between the U.S., Canada and Mexico began in August. They have so far yielded little firm indication of whether a deal can be reached to update the pact, the officials said.
The Canadian dollar fell 0.9 percent to C$1.2574 against the greenback at 3:05 p.m. in Toronto. The peso fell 0.8 percent to 19.3963 per dollar. The rate on Canada’s two-year government bonds declined 8 basis points to 1.71 percent. The yield on 10-year debt was down six basis points to 2.14 percent, with the rate on similar-maturity U.S. Treasuries little changed.
“The market’s been too complacent regarding NAFTA termination risk for too long,” said Bipan Rai, a Toronto-based foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce. “Outside of the Bank of Canada meeting next week, there should be upward pressure on USD/CAD as that premium increases into the next round of negotiations in Montreal beginning Jan. 23.”
Mexican Economy Minister Ildefonso Guajardo has said that Mexico won’t negotiate under duress and will leave the table if the U.S. initiates the withdrawal process. The Canadian officials said Wednesday they were not sure how Mexico would react to any withdrawal notice but that Canada would keep negotiating after one was given.
A withdrawal notice doesn’t mean NAFTA would be killed -- a country can give notice and then not actually leave.
©2018 Bloomberg L.P.