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Scotiabank has outlined its analysis of the USMCA (United States-Mexico-Canada Agreement) renewal process, highlighting a base case scenario where the trade deal is extended with minimal changes. The bank assigns a 42.5% probability to a deal being finalized before the US mid-terms and a 37.5% chance of prolonged uncertainty through annual reviews. However, it warns of low-probability but high-impact risks, including a 10% chance of outright withdrawal. The report emphasizes that while the agreement is mutually beneficial, political tensions in the US could disrupt negotiations. Stress tests show Canadian GDP could drop 1.9% under a severe tariff scenario, with the Bank of Canada forced to cut rates to mitigate damage. The US would face smaller economic losses but higher inflation, complicating Fed policy. For markets, the uncertainty around USMCA creates volatility in CAD/USD and USD/CAD cross rates. The Bank of Canada’s response to trade shocks and potential Fed rate hikes will be critical for forex traders. Canadian equities and energy sectors are also at risk if tariffs on key exports like oil and potash escalate. The report underscores the asymmetry of risks, with Canada bearing the brunt of trade disruptions. Investors should monitor the July 1 review deadline and US mid-term elections for resolution. Central bank policy divergence between Canada and the US could widen, affecting capital flows. Gulf investors with exposure to Canadian energy or US trade corridors should assess hedging strategies against potential tariff hikes. The key takeaway is that while a deal is likely, the path to renewal remains fraught with political and economic risks.
