- The US and Canada broke an impasse to agree to a NAFTA replacement dubbed USMCA which also includes Mexico
- Compromise on dairy, autos, metals and dispute resolution cleared the way to salve trade relations in North America
- Both the Canadian Dollar and Dow surged on the news; but the implications for the Dollar, Mexican Peso and 'risk' are limited
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A Break Through in the NAFTA Replacement
The standoff between the United States and Canada on trade negotiations wound down to the absolute wire. For weeks, the two sides were in engaged in intense negotiations with some comments of optimism thrown out to keep hope alive. Yet with each short-term target for a resolution arriving and passing, the risk of a clean break between these two large trade partners devolving into a more economic and global threat was growing increasingly ever greater. With the deadline for a deal set for Monday, the two countries came to a last minute deal that found some compromise from both sides on different aspects. Between the two countries, the heartiest response was from the Canadian Dollar. To a lesser extent, Canadian capital markets earned a meaningful response but far from the trigger of a systemic trend. Outside of that narrow range of influence, the impact was 'uneven' at best.
USD/CAD Daily Chart
The Implications of a Turning Point for Global Trade Wars?
There is more inference to be drawn from this particular deal than just the direct implications for Canada and the United States. Given that this one just one of the more contentious fronts on a multi-lines of a global trade war, it is natural to evaluate the breakthrough as a possible path for other standoffs to follow. The two most appropriate corollaries to draw are also United States-centric: the US -European Union (EU) and US - Japan engagements. Back in July, European Commissioner Jean-Claude Juncker and US President Donald Trump agreed to avoid applying any new tariffs on each other so long as they continued to negotiate. That would avert an economically onerous tariff on all European imports from the US and a threat to retaliate with a $300 billion import tax bill by Europe. Of course, President Trump's references to Europe and trade have been far from positive with a clear rift arising in the EU's commitment to pursue trade with Iran, circumventing the United States efforts to slap sanctions on the economy painful enough that it acquiesces to the country's demands. A similar armistice has arisen between the US and Japan more recently with both agreeing to avoid further trade duties so long as they are talking. Here, the situation has not had time to mature and cracks to form. Will these two counterparts to the United States take note and attempt similar course to find their way out of the country's sights? At the very least, it is likely to encourage further effort before resorting to more extreme efforts. At best, it could indeed set the parameters for establishing what the acceptable compromise lines with the instigator are in their individual circumstances.
CAD Index Daily Chart
Assessing the Influence This Breakthrough Has on Various Markets
Evaluating how heavy and long an impact this particular development has on the market requires a comprehensive evaluation. Technically, the resolution of the USMCA involves the United States, Mexico and Canada. While US equity indices climbed (they will advance at any positive sign), the Dollar was clearly little swayed by the development. There are too many threads pulling the Greenback in different directions for this particular resolution to offer true relief. For Mexico, the threat was more concentrated and solution a more substantive relief; but the currency (Peso) wasn't standing at a significant discount to prompt a necessary recovery. The Canadian Dollar was under considerably more speculative pressure, such that the news offered a footing to recovery. An equally-weighted Canadian Dollar Index showed a dramatic rally, but how long can this drive? This is averting a crisis, not ushering in a new speculative windfall for global investors. That same assessment should be applied further away from the fundamental impact site. For broad risk trends, the hope that trade restrictions globally will start to fall and allow for collective growth and investment is even further afield. The US tension with the EU and Japan may ease, but the US-China trade war will not follow the same story line. And, referencing the discount-for-value concept, if this entire thematic risk were to evaporate, would it put record high US equity indices at double the previous cycle high in a position to start a new and lasting bull trend? We discuss the influence and implications of the NAFTA negotiation breakthrough in today's Quick Take Video.
DJIA Daily Chart
Written by John Kicklighter, Chief Currency Strategist for DailyFX.com