No BAFTA's for NAFTA play writers today, and here's why

  • The North American Free Trade Agreement (NAFTA) is of topic today being the deadline set by House Speaker Paul Ryan.
  • NAFTA is bearish for Mexican peso and the Loonie.

It had seemed to be converging to an encouraging outcome, where both Canada and Mexico appeared to be prepared to make concessions in the ongoing NAFTA re-renegotiations. In fact, speaking in NY today, Canada's Trudeau, who is feeling positive about NAFTA, said that it has been incredibly positive for all 3 nations and that there is a good NAFTA deal on the table.

However, he declined to comment if a NAFTA deal can be done this year - (it sounds like there are sticking points that can't be resolved today, including the Sunset Clause and the Dispute Resolution). Hence USD/CAD has seen little downside today, (certain CAD risk premium remains justified until the NAFTA negotiations have actually been successfully concluded). 

Chances are, NAFTA can't be done by 2018, and here is why

But here is the thing - while nations such as Canada and the U.S, might be feeling positive about NAFTA, Mexico is a different bag of 'frijoles' altogether. Political headwinds aren’t in the deal’s favour, especially for Mexico. 

Mexico will choose a new President on the 1st of July this year and it looks to be a dead cert for the veteran leftist Andrés Manuel López Obrador. He doesn’t oppose a NAFTA renegotiation on principle, because he knows the loss would harm Mexico’s economy far more than that of the U.S. or Canada.  If no deal has been agreed upon before December when he will potentially take office if he wins the election, he is likely to replace the entire Mexican negotiating panel - and sending the entire process into reverse - the pact that has governed cross-border trade since 1994 will be way back up in the air once again and that is bearish for both the Loonie and the Mexican peso.  

Moreover, even if all three panels of nations somehow come to an agreement in May, President Trump can’t just sign it into law because the U.S. Constitution gives Congress, and not the President, power to regulate commerce with foreign nations - so there are plenty of hurdles along the way through Congress  under the trade promotion rules before anything can be signed off and agreed, hence why House Speaker Paul Ryan calculated that lawmakers would need to see a deal by TODAY in order to be able to vote on it this year. 

Currency impact

At the time of writing, USD/MXN is consolidating the bullish correction from 19.50 (10-D SMA support) at 19.6880 - targetting the double top highs of 1.1990's while USD/CAD has been capped by the convergence of the 21 and 50-D SMAs at 1.2826/25 - fundamentally, the downside is favoured in the Mexican peso and Loonie at this stage. 

 

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