Little Progress in Mexico City
The conclusion of the fifth round of NAFTA negotiations, ending yesterday in Mexico City, once again saw little in the way of significant progress. Given the lack of progress over the duration of these talks it is becoming increasingly unlikely that an amended treaty will be ratified before October 2018. Furthermore, it appears that the likelihood of the US unilaterally withdrawing from the agreement is now increasingly linked to the future of the US administration’s legislative agenda, particularly its tax reform program. However, provided that the tax reform bill remains active in either chamber of commerce the risk of a US withdrawal should be contained.
Talks Flip-Flop Around Mexican Acceptance of US “Sunset Clause”
Ahead of the fifth round of talks, political analysts were optimistic that the talks would see real progress. This view was encouraged further when Idelfonso Guajardo, Mexico’s Minister of Commerce declared his willingness to accept adding mandatory revisions to the treaty every five years.
The headline was widely interpreted as a strong indication that Mexico would concede to the US’ demand for a “five-year sunset clause”. Such a move suggests that the Mexican government are in favour of achieving a quick resolution and willing to accept the US’ proposals in order to avoid dragging the negotiations out, which would heighten uncertainty around the Peso.
However, it seems that the market was too quick to jump on this headline and Guajardo himself explicitly stated that Mexico would not accept a dismantling of the treaty if the US’ “sunset clause” revisions couldn’t be agreed upon. This marks a substantial divide between the US’ demand for a new “sunset clause” and Guajardo’s proposal, which is roughly the same as the current NAFTA configuration whereby any country can demand a revision at any point. Consequently, what was initially seen as positive sign of progress in the talks has now become another stumbling blocks, showing both sides unwillingness to co-operate.
Updated US Demands
During this round of negotiations, the USTR published an updated document detailing its new proposals such as; requiring 50% US and 85% NAFTA content on cars wanting to qualify for 0 tariffs. This requires reciprocity on access to government contracts, elimination of Canadian tariffs on imports of dairy, poultry and egg products alongside the inclusion of mandatory revisions to NAFTA. At this stage, it is clear that the US’ objectives are far tougher than they initially appeared in June last year.
Despite the difficulty with talks, MXN rallied into the end of the round as headlines suggested that negotiators were close to closing chapters on Telecom, energy and e-commerce. Although this is clearly a positive sign, these are not the issues stalling the negotiations.
In all, the fifth round of negotiations did not cause as much market volatility as was seen during the Washington round, with MXN rallying against USD over the course of negotiations. There are now only two rounds of negotiations left and the parties involved are yet to discuss key issues such as rules of origin and the future of Chapter 19 of NAFTA.
Furthermore, it appears that on these contentious issues, Mexico and Canada have a co-ordinated strategy aimed at showing resilience in the face of the US’ demands for concessions. An example of this is where, instead of presenting a counter proposal to the US’ goal of establishing a requirement for 50% US content on cars, Canadian negotiators instead presenting in detail, the economic threat to the US auto industry from its proposal.
Market Reaction & Technical Perspective
Uncertainty around the talk has continued to weigh on MXN with the CME showing that net long positions on MXN futures are now around 50% smaller than they were around mid-July. A further scaling back of long exposure appears likely, given the difficulties in these talks and the likelihood of further challenges in the upcoming rounds.
The current sell-off in USDMXN is setting up the potential for an inverse head and shoulders pattern. If price sustains a test of support around the 18.4117 level this could signify the right shoulder of the pattern, signalling a rotation back up to the neckline around 19.3124 where a break would pave the way for a deeper run higher.