Market Insider

Mexican peso, Canadian dollar jump on optimism for NAFTA deal

Key Points
  • The Canadian dollar and Mexican peso rose against the U.S. dollar on optimism the U.S. may be softening some of its hard-line stance in the renegotiation of the North American Free Trade Agreement.
  • A Canadian press report that the U.S. was relaxing its demand for 50 percent U.S. content in North American automobiles helped sentiment toward both the currencies.
  • Goldman Sachs economists said they believe trade policy risks are at a near-term peak but a U.S. withdraw from NAFTA looks unlikely.
A worker on an auto assembly line in Smyrna, Tennessee.
Luke Sharrett/Bloomberg/Getty Images

The Canadian dollar and the Mexico peso rose on optimism that the U.S. may be softening some of its hard-line stance in the renegotiation of the North American Free Trade Agreement.

A report in the Globe and Mail said that the U.S. dropped demands for the inclusion of 50 percent U.S. content in automobiles, which is seen as the most contentious issue in the talks. Prime Minister Justin Trudeau also said Wednesday that he remained optimistic Canada would get a good deal in the NAFTA renegotiation.

"That's been one of the most contentious issues. Certainly it increases the chance of getting something done before the Mexican election," said Andres Jaime, emerging markets strategist at Morgan Stanley. "But on the other hand...it's still very unlikely they're going to get anything done before the election because it's not the only contentious issue." The Mexican election is July 1.

The optimism around the North American talks also comes as the U.S. is set to levy a whole slew of tariffs against China on Thursday.

What is being discussed on the North American auto sector was not clear, but trade experts do not believe the U.S. has backed off on its demand for more U.S. content though it may have altered it.

U.S. Trade Representative Robert Lighthizer, during congressional testimony Wednesday, said a "great deal of progress" has been made on NAFTA but there's still "a ways to go." He also said he is working closely with the auto industry to bring jobs back to the U.S. from Mexico. He added that the objective is to get more U.S. content into vehicles, which boosts Canadian parts as well.

The Canadian dollar rose 0.8 percent, to 1.30, and the peso gained nearly 0.9 percent, to 18.60.

Lighthizer did clarify that Canada and Mexico would be exempt from 25 percent tariffs on imported steel and 10 percent on aluminum. Canada is the biggest exporter of both metals to the U.S., but the U.S. has set its sights on China dumping of cheap steel and aluminum.

Goldman Sachs economists Wednesday said they believe the risks around U.S. trade policy are at a near-term peak but NAFTA talks appear to be making progress.

"While NAFTA renegotiation remains a risk and adverse headlines are a clear possibility, a US withdrawal from NAFTA looks unlikely," said the Goldman economists.

President Donald Trump signaled the U.S. willingness to continue working on NAFTA when he sent a request to Congress on Tuesday to extend the Trade Promotion Authority for three years, in effect extending NAFTA talks. The TPA deadline for extension was April 1, and some trade experts had said if talks were going poorly, Trump could have moved to withdraw from them at that point.

"I think the market is getting a little more optimistic on NAFTA because the U.S. is focused more on China," said Dan Katzive, head of North America foreign exchange strategy at BNP.

Jeff Rubin, senior fellow at the Center for International Governance Innovation, said the U.S. auto content rule was unclear to begin with and it's not clear that it has been dropped.

"On the surface, it looks like the Trump administration is backing down and Canada and Mexico are advancing their interests and safeguarding their interests. That's the face value. The real threat is that this is a bit of a paper tiger until we know what the cost of not meeting the content regulations really is," said Rubin.

He said if there is a rule demanding more U.S. content in vehicles, it's not clear there would be a stiff enough economic penalty to offset the much cheaper cost of producing cars in Mexico or with Mexican parts.

"I think you have to take [Trump] at his word that he intends to bring back jobs to the U.S. auto industry," said Rubin.

"If I'm a shareholder in GM or Magna, I'm going to question why we're paying people $35 an hour," Rubin said. "The interests of the shareholders in Magna and General Motors are not necessarily in the interest of the Canadian and American auto workers. ... The wage rates which are a fraction of the U.S. or Canadian rates are the highest paid manufacturing jobs in Mexico. There's no shortage of people to take those jobs."

He said the peso has lost half its value since the year 2000, and that alone has helped add to Mexico's more than $60 billion annual trade surplus with the U.S.