Market Insider

Mexican peso recovers from steepest losses as market sees no proof Trump is dropping NAFTA

Key Points
  • The Mexican peso fell after President Donald Trump said he didn't think the U.S. could make a deal in the current NAFTA negotiations and may end up terminating the trade pact.
  • The peso recovered most of its losses Wednesday after markets saw no immediate threat in Trump's comments.
  • Analysts said Trump's comment may have just been a negotiating tactic, and there seems to be a divide in the administration about how to deal with it.
Mexican Secretary of Economy Ildefonso Guajardo Villarreal speaks at a news conference prior to the inaugural round of North American Free Trade Agreement renegotiations in Washington, U.S., August 16, 2017.
Aaron P. Bernstein | Reuters

The Mexican peso took a sharp hit in thin morning trading but recovered much of its losses as investors saw no immediate impact from President Donald Trump's threat to drop out of NAFTA.

Trump's comments came just as trade representatives have begun negotiations to revamp the North American Free Trade Agreement, which the Trump administration views as unfair to the U.S. and responsible for the loss of American jobs.

"Personally, I don't think we can make a deal ... I think we'll end up probably terminating NAFTA at some point," the president said at a rally Tuesday evening in Arizona.

The peso slid in very thin trading late Tuesday and early Wednesday. "It's not really a 24-hour-a-day currency," said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman. Chandler said the peso sold off in light Asian trading before midnight Tuesday after Trump spoke, and it hit a low of 17.845 to the dollar just before the U.S. market open Wednesday.

The peso then erased its more than 1 percent loss and was trading off just about 0.3 percent in the afternoon, at 17.71.

The peso has been a proxy for Trump's views of Mexico and trade since even before the election. After a sharp decline last year, it is now up more than 14 percent year to date. Chandler said the peso has been in a range between 17.50 and 18 since mid-July, so its move was fairly contained.

"I think Trump's comments on NAFTA last night reflects his true view, which is in order to get a good deal, we have to withdraw," said Jonathan Lieber, head of Eurasia Group's U.S. practice. "To some degree, he's playing good cop, bad cop, while [U.S. Trade Rep. Robert] Lighthizer is playing the good cop."

Lieber said Trump is using the strategy he might use in any deal negotiations, adding there seems to be a difference of opinion within the administration on how to proceed with NAFTA. Lieber said for now Trump's tactic is not prevailing.

"I think it's part of the negotiation tactics, and it's scary because the negotiations just began," Chandler said.

Mexican and Canadian officials have portrayed NAFTA as a success that just needs tweaking to modernize. Canada and Mexico are two of the three largest trading partners with the United States. Analysts see ending NAFTA as an unlikely outcome, as it would potentially be disruptive to the economies of all three countries, whose supply chains are tightly interconnected.

"This is sort of the rule of thumb. When Trump talks bad about something, you wait for the dip and buy," said Chandler.

Earlier this year, Trump said he decided not to terminate NAFTA and instead renegotiate it after calls with both countries' leaders.

The negotiations began last Thursday. Lighthizer said the Trump administration believes "NAFTA has fundamentally failed many, many Americans and needs major improvement."

One issue is over the rules of origin, which the U.S. would like to see change. The regulations stipulate how much of a final product may include non-NAFTA country components to qualify for NAFTA tariff benefits. Lighthizer put special emphasis "on autos and auto parts," saying that a new agreement "must require higher NAFTA content, and substantial U.S. content" for products to qualify. A new accord must include a product's country of origin is "verified, not deemed," he said.

At the crux of the talks is Trump's concern that the U.S. has not been fairly treated under NAFTA, and that China has been able to use the agreement as a backdoor to slip its goods into North America. One sore point for Trump has been that Mexico is running a more than $60 billion trade surplus with the U.S.

In the same speech Tuesday, Trump vowed to build a wall across the southern border of the U.S. to block illegal immigration from Mexico. He said he would allow the government to shut down if the wall is not included in a government spending bill. Democrats have said they would not vote in favor of funding for the wall.