U.S. officials are visiting Mexico Friday, adding to speculation that the Trump administration may be looking for a victory on another trade front while tensions escalate with China.
"We believe the administration is looking to cut a deal on NAFTA or some deal on zero tariffs for autos," said Dan Clifton, head of policy research at Strategas Research. "We believe that of the two, NAFTA has a better shot at conclusion."
Secretary of State Michael Pompeo will be in Mexico on Friday meeting with the current president and the president-elect of Mexico, Clifton noted. 'It's worth keeping an eye on since so much work has already been done on NAFTA."
Pompeo and White House adviser Jared Kushner, President Donald Trump's son-in-law, are expected to travel to Mexico City to meet incoming president Andres Manuel Lopez Obrador. Treasury Secretary Steven Mnuchin and Homeland Security Secretary Kirstjen Nielsen also will be attending a meeting with Lopez Obrador at his campaign headquarters, according to news reports.
The peso, which has been rising, was up more than 1 percent Thursday and is up about six percent since the July 1 election, as investors bet the administration of Lopez Obrador, a socialist, will be more business friendly than expected. That has also helped the outlook for NAFTA, also as Mexico's Economy Minister Ildefonso Guajardo said Wednesday that he was working out details for a meeting on NAFTA with U.S. Trade Representative Robert Lighthizer for the end of July in Washington. Guajardo is part of the outgoing government, but in comments to Reuters he said his responsibility is to find a solution on NAFTA that works for everyone.
"If there is room before the end of this administration, we will certainly take advantage of the opportunity to conclude [negotiations]," he said. Lopez Obrador takes office on Dec. 1.
"Lozpez Obrador has tried to smooth the concerns of international investors and American companies but he hasn't really discussed much around immigration and security," said Hartasánchez. He said the president-elect has also shown that he will work with the outgoing administration and that he's willing to speak with the U.S., both positives.
"We know Lopez Obrador would want to move forward and modernize NAFTA. It could be a talking point. It's probably being discussed, but I don't see that as the most critical issue on the agenda," said Juan Carlos Hartasánchez, Albright Stonebridge Group senior director. He said security and immigration are likely higher on the agenda.
With the administration's latest batch of tariffs against China worrying markets, some think the administration will not want to wage trade wars on all fronts and could move to resolve disputes with the European Union on autos or with Canada and Mexico over revamping NAFTA. The visit Friday could be a warm up for renewed efforts on the North American Free Trade Agreement.
"With investors and Congress getting restless, we believe the President knows he needs a win on trade policy, outside of China. Investors are willing to give Trump a leash on China, but the market is uneasy with three balls in the air: 1) NAFTA; 2) EU Autos; and 3) China," wrote Clifton.
NAFTA talks were put on hold until after the Mexican election July 1, and it was assumed there would be no progress until after the U.S. midterm elections in November. Canadian Prime Minister Justin Trudeau briefly spoke with Trump Wednesday on the sidelines of the NATO meeting. It was their first discussion since the G-7 meeting, when Trump withdrew from the communique because of Trudeau's comments on trade, according to news wires. They were said to discuss the new dynamic of trade talks with the inclusion of Lopez Obrador.
The peso is up about 9 percent since the middle of June.
"There's actually people getting optimistic on Mexico," said Jens Nordvig, CEO of Exante Data.
"I think what's happening on trade is we have this endless escalation against China, but I don't think we'll have an escalation on the other fronts," Nordvig said. "The push back against that is going to be extreme."
He added that the administration may be using a new found relationship with Mexico as a lever to pressure Canada. Trump has said he would like bilateral trade talks with Canada and Mexico, so that may be an agenda item for the U.S. in Friday's meetings.
Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman, said Mexico is one market favored by emerging market investors looking for a re-entry point after the recent rout.
"In the EM bloodbath, everybody gets hurt, but you have a list of companies that should be able to recover quickly and Mexico is like that," said Chandler. But Chandler said AMLO, as Lopez Obrador is commonly called, may have some common ground with the Trump administration on NAFTA, like the idea that Mexican workers should be paid more.
But concerns remain about his views towards business, including the development of the key energy business which the Mexican government has opened to foreign investors in an effort to stem its decline.
But Hartasánchez said he is skeptical much headway will be made on NAFTA in the near term. "It seems that everybody has kind of accepted that they are putting this off to November. What they might try to discuss is whether they can advance in the interim so they are in place to announce an agreement in November," he said.