On Tuesday, the Mexican peso had its best day since June and the Canadian dollar rallied after news broke that NAFTA negotiations between the US, Mexico and Canada would be extended into 2018.
The peso and “loonie” initially weakened on reports that Mexico and Canada would refuse to yield to US demands and that negotiations might unravel. According to CNBC, the Trump administration are playing hardball in their push for reduced Canadian dairy subsidies, higher Mexican wages and more US-made parts in vehicles manufactured in North America.
NAFTA – a 1994 free trade agreement between the aforementioned countries – has previously been described by President Trump as a “job-killing disaster” for America and US Trade Representative Robert Lighthizer said this year that he feels that NAFTA had “fundamentally failed many, many Americans and needs major improvement.” Under Trump’s leadership, Washington now seeks to revamp the agreement for the betterment of American trade.
While uncertainty over trade talks has rattled markets in each of the three effected countries, Trump’s move to create “NAFTA 2.0” is not unwelcome by Canadian or Mexican business leaders.
“For so many years…there just wasn’t the political will to reopen NAFTA. This is a once-in-a-lifetime opportunity to really move the ball and move the puck,” Dan Ujczo, president of the Ohio-Canada Business Association, told U.S.News.
“For Mexico, this is an ideal opportunity to democratize trade. A NAFTA 2.0 will…lead to a more inclusive economy where more sectors, regions and firms take part in globalization,” said Luz Maria de la Mora, managing director of LMM Consulting and formerly of Mexico’s Foreign Affairs Ministry.
Shortly after 10am in New York, USD/MXN rose (the peso fell) to a five-month high of 19.512. A near-2% reversal from that point to 18.784 put the pair down (peso up) 1.3% on the day.
The peso was one of the stars of the first half of the year, having strengthened by 17% against the dollar between January and mid-July. Since then, the currency has given back more than a third of its gains as dollar sentiment has taken a turn for the better and, of course, on fears over future trading agreements.
While there are some doubts about NAFTA’s overall economic impact in Mexico – the country’s post-NAFTA economic growth has averaged just 1.3% and poverty levels are unchanged – the fact remains that nearly 80% of Mexico’s exports go to the US, and the agreement is seen as especially important to the country’s agricultural and auto-manufacturing industries. Agricultural exports to the US have tripled since 1994 and several hundred thousand jobs have been created in vehicle production plants. For these reasons, a favourable NAFTA agreement is seen as vital to the outlook for the Mexican economy and, consequently, to the Mexican peso.
Like the peso, the Canadian dollar weakened and reversed during Tuesday’s New York session. USD/CAD climbed (the Canadian dollar fell) to a seven-day high of 1.2591 before making its turn. The pair ended the day unchanged at 1.2520.
Like many other currencies, since late September the Canadian dollar has drifted sideways on low volatility against USD. The loonie has failed to pick up along with oil’s recent climb, which would ordinarily add support to Canada’s currency. When last seen, oil futures were trading back above $52 per barrel and were up 5% on prices from one week ago. Despite some recent weakness, the Canadian dollar remains 7% higher against USD than it had been at the start of the year.
A Canada-US free trade agreement predated NAFTA – that being 1989’s CUSFTA – but even still, like those of Mexico, Canada’s agricultural industries received a big boost following NAFTA’s introduction, with the volume of agricultural goods going south of the border tripling since 1994.
Author: Joel Wright
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