Well the loonie and the peso staged sharp relief rallies overnight after Donald Trump flip-flopped (again) on NAFTA.
As it turns out, he won’t terminate it after all, which is good news for anyone who is sane. Trump spoke with Canada Prime Minister Justin Trudeau and Mexico President Enrique Pena Nieto yesterday. The President “agreed not to terminate NAFTA at this time and the leaders agreed to proceed swiftly, according to their required internal procedures, to enable the renegotiation of the NAFTA deal to the benefit of all three countries,” the White House said last night.
“It is my privilege to bring NAFTA up to date through renegotiation,” Trump remarked, adding that he “believes that the end result will make all three countries stronger and better.”
Whatever. All we know on Thursday morning is that the comments made the loonie and the peso “stronger and better.”
“One-week implied volatility in USDCAD hit its strongest level in nearly seven weeks as amid positioning that is heavily skewed toward CAD shorts,” Bloomberg wrote overnight.
Here’s some further color from former FX trader Mark Cudmore.
Donald Trump’s flip-flopping comments on the Nafta deal this week have caused volatility for both the loonie and the peso. This will be the catalyst for a medium-term relative value move that favors Canada.
- Investors will soon tire of headline-trading Nafta tweets from Trump. Short-term traders love it but it’s just causing whiplash for the macro managers. It’s time to differentiate between the outlook and consequences for Canada and Mexico, which so far have been largely lumped together
- This week’s lumber levy was completely overblown and misunderstood. This process was started pre-Trump and analysts had feared a more severe tariff. There’s a genuine increase in trade tensions, which could add some marginal problems for the Canadian economy, but the prospect of a true trade war with the U.S. is remote
- Canada is the U.S.’s second-largest trade partner, but only accounts for its fifth-largest deficit. As a percentage of the countries’ total trade, the deficit is small – 11% compared with 21% for Mexico and 55% for China. Trump’s administration knows that there’s little to gain, and a massive amount to lose, from a trade war with Canada
- Mexico is a different story. Most analysts would agree that both countries would suffer from any serious deterioration in the trading relationship, but at least Trump has the incentive of being able to narrow a sizeable imbalance
- Canada and Mexico are also negotiating from vastly different positions of strength. Canada is forecast to grow faster than the U.S. in 2017, accompanied by lower inflation and better terms-of-trade dynamics. It’s exactly the opposite for Mexico
- I wrote three weeks ago how Mexican peso optimism had gone too far, given the country’s economic plight. And as highlighted on Tuesday this week, the whole emerging markets FX complex is now looking more vulnerable
- I’m far from a structural bull on the Canadian dollar, but it looks set for a medium-term outperformance to the peso even if Nafta is left unchanged. And beyond the short-term headline trading, any Nafta action is likely to accelerate that rather than reverse it
- Perhaps the excessive short-term volatility can start to seem appealing to the macro manager after all, when looked at from the perspective of relative-value opportunities