Forex Trading Library

NAFTA Deadline Approaching

Possible Ouctomes & Market Impact

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The market is now entering a crucial phase regarding NAFTA negotiations as the October 1st deadline, imposed by the US, moves ever closer. Indeed, US negotiators are piling on further pressure by saying that Thursday 20th September is the last chance for Canada to agree to the preliminary deal agreed upon by Mexico and the US. The timing is to allow for a deal to officially be approved by the incumbent Mexican administration before power shifts hand on December 1st. A 60 day consultation period is required by US laws referring to the time between presenting a treaty to Congress and the signing of a treaty.  If the deal is to be approved by the new Mexican administration is not so clear that it would sign such a deal, putting NAFTA in jeopardy once again.

Trudeau Sticks To His Guns

However, up to this point, Canadian PM Trudeau has, to the frustration of the US, been fiercely stubborn about securing his demands sticking to his mantra that no deal is better than a bad deal. Once such reason for this perhaps is the timing of Canadian provincial elections which fall on October 1s5 in Quebec. With around 50% of the country’s dairy farms located in Quebec, if Trudeau was to agree to concessions to grant US farmers access to Canadian dairy farms ahead of the vote it could have severely negative consequences.

However, Canadian negotiators insist that the deal is because several priority issues remain unresolved such as the independent dispute mechanism regulated by Article 19, cultural exemptions and de minims shipping thresholds and intellectual property protection.

It is worth noting though that some deadlines have already agreement during to see at least the NAFTA negotiations and what is clear at this stage is that all parties involved want to agree on a deal, as such, we don’t see a huge deal of risk premia in the market around this latest deadline.

forex canada

Possible Outcomes

The market is now facing three possible outcomes: deal, no deal but negotiations continue, no deal with no plans for further talks.

  • Deal

If an announcement is made this week that a deal has been struck, this will take the market by surprise given the continued sentiment expressed by Canadian officials regarding their dissatisfaction with the current terms offered by the US. However, such a deal would be a boost to risk appetite and likely see CAD and MXN trade higher. NAFTA uncertainty has been a critical risk for the BoC and an ongoing obstacle to further monetary policy tightening so the removal of this risk would be welcomed by the BoC and CAD bulls alike.

  • No deal but further negotiation

This would appear to be the most likely outcome at this stage given the tone of recent comments from Canadian officials. It is also worth noting that support in US Congress for a bilateral deal which excludes Canada is low, so if no deal is agreed, political pressure is likely to at least see further negotiations take place. Uncertainty regarding the likelihood of Mexico officially signing a delayed deal might increase however as the decision would move into the hands of the incoming Mexican administration. However, statements from the new leadership regarding the deal in question have been supportive thus far.

  • No deal and no further negotiation

This outcome appears the least likely and as such would have the biggest impact on the market. Such an outcome would increase expectations that the US will pursue a bilateral deal with Mexico alone along with the US officially withdrawing from NAFTA, as Trump has often threatened to do. This outcome would have a strong negative effect on CAD and would create a big barrier to further BoC monetary policy tightening. The extent of the moves in USDCAD would be contingent on the post-decision rhetoric from both sides and also the response from the BoC.

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