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There’s News On NAFTA, And For Once It Isn’t Terrible

Anything that isn't bad news is great news.

As with all things related to Donald Trump and trade, it’s nearly impossible to get a clean read on NAFTA negotiations which really aren’t “NAFTA negotiations” in their current incarnation given that Canada isn’t involved.

For weeks, Robert Lighthizer has been working with Mexico to hammer out differences that, if resolved, would pave the way for Canada to come back to the table. For his part, Trump has spoken favorably about the ongoing discussions on Twitter, a rare break with precedent when it comes to the tone this President typically takes when it comes to America’s southern neighbor.

“Our relationship with Mexico is getting closer by the hour”, Trump tweeted on Saturday, adding that there are “some really good people within both the new and old government”. Turns out, not all Mexicans are drug-dealing sexual predators. Who knew, right?

The President when on to tease what he’s characterizing as “a big trade agreement” which “could be happening soon!”

Trump still seems antagonistic towards Canada though, which means a complete NAFTA deal is likely to be some ways off.

On Saturday, Jesus Seade (he’s in charge of negotiations for Mexico’s incoming government), suggested the Trump administration has watered down demands for the “sunset clause”, a previously intractable sticking point.

“It’s going to come out”, he said over the weekend, adding that “it’s no longer what the United States was putting first in any way.”

That’s good news, as nobody liked it in the first place. Obviously, if you have to continually worry about a trade agreement being canceled every five years, you’re not going to be very committal when it comes to investment and spending if you’re a business leader.

In any event, Bloomberg is out on Sunday reporting that negotiations between the U.S. and Mexico should be “wrapped up” by Monday.

“The nations achieved significant breakthroughs in the past several days on the critical issues of automobiles and energy”, Bloomberg says, citing people familiar with the talks before adding that “it remains unclear how U.S. and Mexican negotiators would make public the completion of work on their bilateral issues, given that Mexican Economy Minister Ildefonso Guajardo has signaled that the nation won’t make an announcement on Nafta until Canada also signs on to a new deal.”

There are more details in the linked piece, but suffice to say any concrete progress would be welcome as it could help to offset any negative sentiment on trade that could accompany indications the Trump is prepared to move ahead with tariffs on an additional $200 billion in Chinese imports, the most consequential escalation yet in the simmering feud between Washington and Beijing. Here’s a handy visual summary of where things stand on global trade from BNP:

TradeUpdate

(BNP)

In a separate note that focuses specifically on NAFTA, BNP is sticking with their view that “the final outcome should be a positive one, with the deal remaining in place but with the negotiations continuing until later in the year, possibly breaching into 2019.” Here’s another possibly helpful visual:

NAFTA2

(BNP)

Anyway, there’s obviously a read-through for the peso here, and again, this is another one of those scenarios where any news that isn’t bad news is great. EM FX was under immense pressure headed into last week and although the Trump-inspired selloff in the dollar (which accelerated on Friday thanks to the PBoC’s move to reintroduce the CCAF and Jerome Powell’s “dovish” Jackson Hole speech) took some of the pressure off, positioning through Tuesday was still the most bullish since January 2017.

USD

(Goldman)

Considering that captures Trump’s Fed criticism, it would appear it’s going to take more than some presidential jawboning to shake the long USD conviction out of folks. To the extent the peso can serve as an oasis of sorts in EM FX thanks to progress on trade, that would be welcome. At the very least, you’d think it would outperform some of the other EM high-yielders that are at the center of the storm, whether by circumstance (e.g., ZAR), by political uncertainty (e.g., BRL) or by self-inflicted wounds (e.g., Turkey).

On that note, we’ll just leave you with a quick bit from Barclays:

The slow incremental information on the implementation of AMLO’s program and key medium-term risks such as NAFTA suggests upside risks for the MXN relative our previous forecasts and relative to other EM FX at least in the near term. We continue to look for a stronger USD vs. EM currencies amid Fed normalization, pressure on capital flows, trade protectionism, and EM policy credibility issues. The MXN appears to be a relatively better performer with less severe current account financing needs, reduced risks of US trade protectionist action (for now), and policy credibility (for now).

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