The Mexican peso and Canadian dollar both moved slightly higher after President Donald Trump said the U.S. may do a trade deal with Mexico and then do a deal with Canada later.
While a sign of positive momentum with Mexico, the comment cast doubt on efforts to revise the 24-year old NAFTA agreement. The U.S. talks with Canada and Mexico on a new North American Free Trade Agreement were put on hold ahead of Mexico's July 1 presidential election. U.S. officials have since visited Mexico's current government and president-elect Andres Manuel Lopez Obrador.
Trump, in a cabinet meeting Wednesday, said there have been "good sessions" with Mexico and Lopez Obrador, who met with Secretary of State Mike Pompeo last week. Lopez Obrador said he wants good relations with the U.S. and that his transition team would participate in NAFTA talks.
Earlier, White House top economic advisor Larry Kudlow said there is "good progress" being made with Mexico on trade, and the discussions are a "promising avenue."
A separate deal with Mexico without Canada is unlikely to be acceptable to Congress, said Jon Lieber, PwC principal, national economics and statistics. He said the talks with Mexico are more likely at this point to be outreach to the president-elect rather than a prelude to a NAFTA deal in the very near future.
"You kind of think NAFTA is going to be on the back burner for a good part of the year," Lieber said, adding it's doubtful there will be a NAFTA agreement before the midterm elections. "By branding NAFTA as a terrible deal, even a renegotiated NAFTA is going to be hard for Congressional Republicans to really embrace."
Political strategists have said the Trump administration may use a warming relationship and progress with Mexico to prod Canada on some areas of disagreement. They also have said the administration is looking for a win on trade, since talks with China have stalled.
The Trump administration has said it would like bilateral deals, even as it renegotiated NAFTA.
"You can always have bilateral trade agreements, but the thing is NAFTA is what's on the table. The Trump administration initiated the negotiations," said Citigroup North America economist Dana Peterson. "
Peterson said the administration could keep NAFTA in place but develop new independent deals with Canada and Mexico. Or, the administration could come up with new separate agreements and opt out of NAFTA, but that would require Congressional approval.
"It could be a way to try to prod the negotiations to work really hard at finishing up the remaining chapters of which there are many," said Peterson. "When you look at it, you still have NAFTA in the balance. You could stop negotiations, not exit and just work out new agreements. You could leave NAFTA in place and just come up with a combination of other agreements to layer over it."
U.S. relations with Canada have been especially prickly since the G-7 meeting where Trump refused to sign the communique after he initially said he would do so. Trump said Canadian Prime Minister Justin Trudeau made false statements at a news conference, where Trudeau said Canada was going to take retaliatory action against U.S. tariffs.
Trudeau Wednesday shuffled his cabinet, while stressing that Canada needs to diversify trade away from the U.S. Jim Carr, minister of natural resources was moved to a new Ministry of international trade diversification. Canadian Foreign Minister Chrystia Freeland is expected to remain the main NAFTA negotiator and be in charge of ties with the U.S.
Carr was instrumental in pushing the Canadian government to take over the Kinder Morgan pipeline project, which is intended to take Canadian oil to the west coast and on to Asia. For the most part, the U.S. currently is the only destination for Canadian oil.
"The Trudeau administration is moving things around because I think they're recognizing there could be a permanent regime shift with respect to the U.S. and trade. Canada for decades has been very reliant on trade with the United States...it's an easy place to ship goods to and that was not really questioned up until recently," said Peterson.
She said Trudeau probably wants to "chalk up some really big wins" ahead of the 2019 election and will try to show progress in trade deals. "He'll want to have resolution with the U.S., but it doesn't hurt to broaden your horizons," said Peterson.
Canada has protested U.S. tariffs on Canadian steel and aluminum on the grounds of national security and has put its own tariffs on U.S. goods.
"Canada and others now see opportunities to get preferential access to say, the Chinese market, or the European markets," said Lieber. "It creates market opening opportunities between other countries. I think the Trump administration sees themselves as playing a very strong hand because the U.S. has the largest internal market, but playing this ahead a couple of steps you could easily see countries going to other countries for trading relationships.