Canadian dollar soars, stocks rise on trade deal optimism

The Canadian dollar was up three-quarters of cent and Toronto stocks climbed Monday after Canada secured a deal for a trilateral trade pact with the U.S. and Mexico.

Economists are bracing for interest rates to head higher, perhaps at a faster pace than previously predicted, as the uncertainty over trade lessens.

The TSX was up .5  per cent in early trading, but had slipped back by late afternoon for a gain of 31 points to 16,104. The Toronto stock index was regaining ground it lost in the past month during NAFTA negotiations.

The dollar jumped .63 of a cent to 78.09 cents US. The loonie has been hammered since this spring by the on-again, off-again trade talks.

The new deal, called the United States-Mexico-Canada Agreement (USMCA), also buoyed U.S. markets, especially dairy and industrials. It gives U.S. farmers greater access to the Canadian market and seems to diminish the threat of auto tariffs.

The Dow Jones industrial index was up 192 points at 26,6451 at the close, somewhat off its morning highs, while the broader S&P index rose 10 points to 2,924.

Shares of Canada's largest auto parts company, Magna International Inc., were up more than $3 at $69.27, while Linamar Corp. was up six per cent at $63.26 and Martinrea International Inc. gained 10 per cent at $14.57.

U.S. President Donald Trump had threatened to impose punishing auto tariffs on Canada if it didn't reach a deal by Sept. 30.

As a side deal to the new pact, the Trump administration has agreed to exempt Canada if the United States imposes 25 per cent tariffs on imported vehicles and auto parts.

Energy stocks also rose in Toronto, as oil prices went up again. West Texas Intermediate crude is up 3.2 per cent to $75.57 US a barrel and gas also spiked, after a deal appeared close to export LNG from British Columbia.

Husky's bid for Calgary oilsands company MEG Energy had investors piling into MEG, expecting a counter-bid.

The new deal has spared Canada's oil sector from the NAFTA proportionality rule, which would have stopped Canada from reducing the amount of oil, gas or electricity it sold to the U.S. This gives the energy sector more latitude to sell to other markets. 

It also removed a tariff on the diluent added to bitumen to allow it to flow through pipelines, resulting in savings for Canada's oilpatch. 

'A sigh of relief'

Derek Burleton, deputy chief economist at TD Bank, said investors and economic analysts were "breathing a sigh of relief."

"By removing a significant cloud of uncertainty around trade, it is very likely to be growth positive, especially for Canada and Mexico," he said.

Both TD and BMO are speculating that the resolution of trade talks, which have put a drag on the Canadian economy this year, will encourage the Bank of Canada to move more quickly on interest rate hikes.

Bank of Canada governor Stephen Poloz is expected to boost his key lending rate by a quarter point to 1.75 per cent at the next meeting on Oct. 24.

The strength of the Canadian economy in the past year and the Fed hiking rates in the U.S. would seem to be an argument in favour of rate hikes here, but Poloz has held off as NAFTA has dimmed Canada's outlook. 

And three interest rate hikes could be ahead in 2019, rather than two, Burleton said.

"Fixed income investors have come to the same view, as evidenced by a backup in yields — Canada government 10-year yield is up six basis points today and 40 basis points from late-June lows. That said, since the central bank is data dependent, officials will remain in a 'believe-it-when-I-see it' mode when it comes to the investment data and the impact of reduced trade risk on overall growth," he said in a note to clients.

Not everyone agreed. RBC economists pointed to continued uncertainty and said it still expected two rate hikes in 2019.

Optimism in auto sector

There was optimism over the new deal from the auto sector.

Joe Hinrichs, executive vice-president and president of Global Operations at Ford, said the company was "very encouraged" by the announcement of a trade deal.

"We stand ready to be a collaborative partner to ensure this agreement is ratified in all three markets because it will support an integrated, globally competitive automotive business in North America. The benefits of scale and global reach will help to drive volume and support manufacturing jobs," he said in a statement to CBC News.

But the steel and aluminum industries still have tariffs hanging over their heads.

"We are very disappointed that section 232 on aluminum and steel have not been dealt with,and we are strongly urging [Foreign Affairs] Minister [Chrystia] Freeland and Prime Minister Trudeau, who has spent lots of time in our plants recently, to remember our thousands of workers and ensure that Canada's world class aluminum industry can grow free of tariffs and quota," said Jean Simard, president and CEO of the Aluminum Association of Canada.

In a news conference Monday, Freeland said talks continue to address the steel and aluminum tariffs.