Bank of Nova Scotia head of capital markets says Canada doesn't need to fold

Canada and the US are struggling to make progress on a NAFTA deal and Bank of Nova Scotia head of capital markets Derek Holt says that's fine.

"In my personal opinion, Canada should be prepared to walk and not fear the outcome," Holt wrote in a note today.

"The PM is dead right that no NAFTA agreement is better than one that guts NAFTA by removing dispute settlement mechanisms and exposes the country to the questionable trustworthiness of the Oval Office, Congress and the U.S. courts," he wrote.

"That is especially true in the current climate whereby the value of the U.S. signature on its international agreements has seriously diminished and when the U.S. is intent upon rejecting all international accountability for the agreements it signs, whether we're talking NAFTA or the WTO among other examples. "

Earlier today House Majority Whip Steve Scalise warned about moving ahead without Canada but Republicans might not even have the House after the midterms. Holt said the threat isn't credible.

On autos, he also doesn't think that's credible.

Congress may be a passive supporter of Trump's actions against China, but try whacking their districts with U.S. auto tariffs imposed upon Canada. The effort would backfire upon the U.S. auto industry given its high import content of Canadian parts and seamless integration of cross-border production ... Each of the U.S. auto industry, broader U.S. business interests and US organized labour are dead set against U.S. auto tariffs on Canada that would throw U.S. workers out of jobs and toss the entire North American auto industry into a state of upheaval right into the mid-terms."

On Mexico's deadline, he thinks Canada doesn't need to compromise there because Canada doesn't owe Mexico anything after negotiators betrayed Canada. Further, Quebec's provincial election makes it tough on Canada to make a deal before Oct 1.

On the U.S. threat to withdraw from NAFTA, Holt says it's "not gonna happen. The NAFTA agreement requires Trump to deliver a notice of intent to withdraw six months in advance of possibly doing so. The president is not the one who then makes the withdrawal call six months later. That power rests with Congress. At this point, the odds favour Canada in that the mid-terms are likely to strip away the GOP's grip on power in Washington."

USD/CAD is down 37 pips to 1.2936 today on the ebb and flow.