This week we had a very special guest visit the Foreign Exchange desk: Craig Wright, chief economist with the Royal Bank of Canada. We took the opportunity to get his take on some global economic issues:


North of the border, the view on NAFTA is focused on balanced access to trade, access to markets and job creation. Canadian-U.S. trade shows a healthy relationship. The U.S. runs a small surplus with Canada, very different from the large trade deficits that it has with Mexico and China.

In terms of access to markets, for 35 U.S. states, their No. 1 trading partner is Canada. Another six states list Canada as their second most-important trading partner, including California.

Finally, 9 million U.S. jobs are dependent on Canadian exports and investments into the U.S. Taking these facts as a whole, the Canadian view is that NAFTA is a deal worth revising but certainly not discarding.

Tax Competitiveness with the U.S.

The recent tax reform package brought corporate tax rates in the U.S. to levels comparable to Canada. Federal and provincial corporate tax rates combined in Canada are at around 26 percent. Previous to the tax legislation, U.S. federal and state taxes combined were around 39 percent.

Now that the tax rates are at closer parity, some companies are having discussions about where to locate their headquarters.

Canadian Versus U.S. Central Banks

Looking at estimates to the terminal interest rates, both central banks are in the 2.5 to 3.5 percent range.

Going forward, U.S. rates will be on the higher side due to excess demand and the fiscal stimulus – with the U.S. Federal Reserve expected to halt this rate hike cycle at 3.5 percent.

By contrast, Canada is not in excess demand and its economy is experiencing some headwinds currently. That, in addition to a higher sensitivity to interest rates given high household debt, lends to the view that the Bank of Canada is likely to reach its terminal rate at 2.25 percent.

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