USD/CAD Canadian Dollar Higher After US-Mexico Agreement

The US dollar is lower against all major pairs on Monday. A trade agreement aimed at replacing NAFTA was struck between Mexico and the United States. Canadian Foreign Minister Chrystia Freeland is on her way to Washington to join the talks in the hope of extending the US-Mexico trade agreement to include Canada. Investors interpreted the deal as a softening of trade tensions that have dominated the market. Risk appetite was higher at the start of the week as the agreement with Mexico could lead to a softer stance on trade from the Trump administration.

The EUR/USD rose 0.50 percent and is trading at 1.1677 with the Canadian dollar and Mexico peso advancing on the positive trade agreement news.

The Canadian dollar rose 0.36 percent on Monday. The currency pair is trading at 1.2978 after NAFTA optimism appreciated the loonie. The Canadian currency has been under pressure this year as the fate of the trade agreement was uncertain given the tough stance of US negotiators. The talks in Washington between Mexico and the United States have reached a tentative agreement that puts a trilateral meeting happening in the short term. There are some items that need further discussion but the momentum gained with the leadership change in Mexico has resulted in a bilateral agreement.


usdcad Canadian dollar graph, August 27, 2018

NAFTA negotiations have yielded an agreement, but the choice of the US to deal with Mexico first still leaves a lot of question marks regarding how it will affect the Canadian economy. On Thursday Foreign Affairs Minister Chrystia Freeland said she was encouraged by optimism and ready to rejoin the talks. Freeland is headed to Washington to take part in the talks with the goal of wrapping up talks by the end of the week.

BoC Governor Poloz sounded optimistic on Friday that NAFTA will be worked out based on the developments of the last couple of weeks.

GOLD

Gold rose on Monday breaking through the 1,210 price level. The precious metal advanced on the greenback as NAFTA deal optimism cancelled out some of the trade war concerns in August. Mexico and the United States have apparently reached a partial agreement with other items still to be discussed. Both parties mentioned that an announcement is imminent which could be coming later today. The next step would be to bring in the Canadian team as they did not participate in the bilateral talks.



Fed rhetoric last week continued to push for two more rate hikes in 2018. The release of the minutes from the FOMC and Chair Powell’s speech at the Jackson Hole central bank symposium kept expectations unchanged. Inflation remains near the Fed’s target, and limits the appeal of the yellow metal to investors.

Trade disputes have been on the rise and given how the Trump administration has been wielding tariffs on foreign goods they have appreciated the US dollar against commodities. A successful negotiation of NAFTA could reverse the trend.

MEXICAN PESO

The Mexican peso appreciated on Monday. The currency pair is trading at 18.6345 after the Trump administration announced that Mexico and the US had reached a bilateral trade agreement. Trade tensions have kept emerging market currencies under pressure so an agreement is a positive for the peso. Canada was excluded from the negotiations and it now seems that the US plans to replace NAFTA with this new deal.



US President Trump announced it today with his intentions to drop the NAFTA name and called it the US-Mexico trade agreement. Trade representative Lighthizer has said that this agreement will be headed to congress for approval. The US administration will negotiate alongside Mexico with Canada. Canada could then join this trade agreement or seek its own bilateral agreement with the United States.

The peso has been gaining ground against the US dollar after the Mexican elections. The change in leadership also served as an opportunity for the US to negotiate the trade terms, after the lack of traction of the trilateral talks.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza