Trade relations between the U.S. and its partners have taken a lot of heat this year. But after the U.S. seemingly reconciled with the European Union this week, hopes are rising that the same could hold true for the members of the North American Free Trade Agreement.
President Donald Trump met Jean-Claude Juncker, President of the European Commission, in Washington earlier this week where they agreed to make a deal to further their trade ties by breaking down tariffs as well as subsidies.
This struck a very different tone from the protectionist theme previously seen in the rhetoric of U.S. officials, and it’s making it fair to assume that something “similar will happen with Nafta,” said Alicia Levine, head of investment strategy at BNY Mellon Investment Management. “I think the [Trump] administration will make a deal,” she said.
“While the next steps [with the EU] remain vague, markets will take comfort from the shift in tone from protectionism to finding solutions through mutually beneficial trade,” said Dec Mullarkey, investment strategist at Sun Life Investment Management. “The focus on eliminating or minimizing trade friction from tariffs and barriers is a positive departure from the earlier U.S. characterization that trade is a zero sum game.”
“If the follow through is in line with these initial statements, then this creates a promising sign that Nafta negotiations could also get restarted,” Mullarkey said.
Earlier Thursday, U.S. trade representative Robert Lighthizer said “hopefully we are in the finishing stages of achieving an agreement in principle that will benefit America’s workers, farmers, ranchers and businesses.”
Read: Lighthizer reports progress on Nafta, says China to be long-term problem
Lighthizer met Mexican economy minister Ildefonso Guajardo, as well as Jesus Seade who is representing the incoming administration of president-elect Andrés Manuel López Obrador, or AMLO for short.
“Recent comments have struck an optimistic tone highlighting the potential for an agreement ahead of the U.S. midterms,” said Scotiabank strategists Shaun Osborne and Eric Theoret.
Mexico, Canada and the U.S. have been renegotiating Nafta since August last year, so far without a result. Market participants had hoped for an agreement in May, ahead of the Mexican general election, but were disappointed.
Mexico’s election came and went, with left-wing populist AMLO, who has said he will continue on the path his predecessor embarked on, due to take office in December. But the U.S. midterm election in November is the next hurdle, and many analysts don’t believe a deal will be struck or at least voted on before, making it more likely that Nafta 2.0 will be a 2019 event.
The renegotiations of the trade pact have injected a lot of volatility on Canada’s dollar USDCAD, +0.2223% and Mexico’s peso USDMXN, -0.1955% in 2018. Since the beginning of the year the Canadian currency has fallen 3.9% versus the greenback, while the peso remains up 5.4% in the same period.
Meanwhile, the ICE U.S. Dollar Index DXY, +0.57% is up 2.8% in the year-to-date.
