CAD and MXN benefit from new North American trade agreement

Summary:

• The US and Canada agreed to a deal replacing the NAFTA with the USMCA

• Chinese PMI slowed down in September reflecting US tariffs

• Japanese equities move higher, Chinese stock market closed

The Canadian dollar and Mexican peso are by far the best performing currencies this morning in response to a last minute trade deal agreed between the US and Canada over the weekend. As a result, the current North American Trade Agreement (NAFTA) will be replaced with the new accord called the United States-Mexico-Canada Agreement (USMCA) ending the months-long dispute between the two countries. The new trade agreement is to be signed by Donald Trump and then submitted to the US Congress before the end of November. According to some officials taking part in the final stage of negotiations the USMCA will be easily enforceable unlike the NAFTA. The two sides agreed that the new trade deal will be reviewed every six years.

According to two senior Trump administration officials the deal involves improved access to Canada’s dairy market for US farmers (they are to be able to more export their dairy products there) stronger intellectual property provisions, and tighter rules of origin for auto production. Moreover, all light trucks from Mexico are excluded from any possible US auto tariffs whereas Canada will be allowed to export to the US 2.6 million tariff-free passenger vehicles if the latter imposes national security duties on autos. The three countries also agreed to maintain the market-determined exchange rate. What are the implications for the CAD and the MXN? After familiarizing with some details of the new trade accord between the three North American countries, one may arrive at a conclusion that the dispute (particularly between the US and Canada) has been finally terminated. The deal does not seem to contain any adverse parts from a Canadian standpoint and it does remove a great deal of uncertainty surrounding the Canadian dollar. Both CAD and MXN opened clearly higher on late Sunday and they managed to retain these gains during Asian trading hours. When it comes to the USDCAD one may expect the price to move south at least toward 1.2750 after failing to break through 1.3075.

The Canadian dollar is gaining traction against the greenback following the new trade accord announcement. Source: xStation5

Looking beyond the North America one needs to mention China’s manufacturing PMI we were offered during the weekend. The Caixin/Markit index slipped more than anticipated to 50 from 50.6 in August reflecting that US tariffs have started to take their toll on the economy. It was the worst value since May 2017. The release showed downbeat numbers for new orders and export orders suggesting that Chinese factories are facing softening demand from customers both at home and abroad, the perfect mixture for further gradual cooling of the economy. Note that the official China PMI also declined to 50.8 from 51.3. China’s stock markets did not respond to the data as they are closed this week due to holiday. Let us recall that the China’s authorities decided last month to reduce import tariffs (excluding the US) to take some burden off customers.

During the Asian session we were also offered final PMIs from Japan and Australia for September. The former came in at 52.5 compared with flash at 52.6 while the latter saw an improvement to 59 from 56.7 in the previous month - both indices concerned manufacturing. In turn, the Bank of Japan released its Tankan survey. It showed quite mixed numbers for the third quarter with the deteriorated outlook in the large manufacturing companies and the slightly more upbeat prospect for non-manufacturing firms.

The Japanese stock market (NIKKEI) closed today at its highest level since November 1991. The index managed to break through 24150 points and if bulls are able to stay above this threshold, the ongoing surged could be continued. Anyway, do take into account that after such the rally some investors may want to cash in on their positions causing a slight pullback. Source: xStation5

In the other news:

• EU Commission is reportedly set to reject Italy’s budget plans in November, according to Italian Daily La Repubblica citing EU sources

• US dollar trades slightly higher, the 10Y yield moves above 3.06%