Global Risk Appetite Rallies In Response To News of US / Mexico Trade Deal

Attention Now Turns To Canada

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US equity markets soared to fresh record highs this week, shrugging off ongoing concerns over the trade dispute between the US and China, as news of a new trade deal between the US and Mexico took center stage.  Coming on the back of talks aimed at renegotiating the long-standing NAFTA deal, President Trump announced a “really good” deal had been struck. Commenting further on the deal, Trumps said both sides had worked hard and agreed on terms that would allow for an agreement that is “much more fair” than the existing NAFTA agreement.

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Trump Follows Through on Election Promises

Renegotiating NAFTA had been a key aspect of Trump’s presidential campaign as he deems the deal to be extremely disadvantageous to the US. Indeed, the president has at times threatened to scrap the deal altogether if the three parties involved: the US, Canada, and Mexico were unable to agree to terms. Trump has even claimed that he wants to rename the NAFTA deal as the name NAFTA now has “bad connotations”.

Canada Not Yet Part of The Deal

While a deal has been struck with Mexico, it is not yet clear whether Canada will be part of the deal as negotiations are still ongoing there. Commenting on the situation, Trump said: “We will see whether or not we decide to put up Canada or just do a separate deal with Canada”.  Negotiations with Canada have been fraught with both countries clashing over a host of trade issues including Canadian dairy protections and US tariffs on Canadian Steel and aluminum. The US administration has also threatened Canada with a tariff on cars.

Comments From Canadian Leader

Commenting on the update, the Canadian Prime Minister Justin Trudeau told reporters that he has had a “constructive conversation” with Trump following the US / Mexico deal which, alongside news that the Canadian foreign minister is traveling to Washington next Tuesday, is bolstering market expectations of a full renegotiation of NAFTA to include Canada. A key US trade official said “There are still issues with Canada but I think they could be resolved quickly.

The US Pushing For The Deal Quickly

The impetus to strike a deal with Mexico so urgently is linked to the political backdrop in the country. The US wants to agree on a deal ahead of newly elected president Andres Manuel  Lopez Obrador taking office in December. The new president has shown reluctance to continue in the path of former president Enrique Pena Nieto who opened up the country’s energy sector. A reversal of this policy could severely complicate negotiations.

In order to achieve this, the Trump administration is required to present a new deal to Congress at least 90 days ahead of the date the new president will take office in Mexico, meaning a deal must be presented by Friday. Commenting on the situation, Mr. Obrador has said that the deal with the US is the first part of the puzzle in agreeing on a new treaty.

Risks That NAFTA Renegotiations Could Fail

However, there is still a risk that a full renegotiation of NAFTA will not happen.  The incoming Mexican president said “We’re very interested in it remaining a three-country deal” adding that “The free-trade agreement should remain a three-country deal”, even though the Mexican foreign minister Luis Videgaray told reporters that Mexico is prepared to strike a bilateral trade deal with the US even if Canada does not join the treaty.

Technical Perspective

 

The Mexican Peso rose against the US Dollar in response to the announcement which has also bolstered global risk appetite. For now, USDMXN remains range bound within the large, long-term contracting triangle pattern which began at the 2016 highs. To the downside, the next key support is the 18.4017 summer low, with the rising trend line from 2017 lows coming in just below. To the topside, the next key resistance is the 19.3699 high.

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