Does NAFTA spell ‘Not Another Failed Trump Action’?

Does NAFTA spell ‘Not Another Failed Trump Action’?

Michael O’Neill

FX Trade Strategist /


· USDCAD drops even though Canada CPI data came in as expected

· Talks to revise NAFTA began on August 16

· Dog days of summer next week due to a lack of top-tier economic reports

· President Trump’s antics will keep FX majors in their current broad ranges


Niagara Falls on the US-Canadian border. Photo: Shutterstock

By Michael O’Neill

NAFTA is the acronym for the North America Free Trade Agreement.

Ripping up the NAFTA deal was a cornerstone of Donald Trump’s presidential campaign last year, and the renegotiations began on August 16.

He said he would repeal Obamacare, but failed. He said he would build a wall between Mexico and the US — failed. He said he would ban Muslim immigration — failed. He promised huge infrastructure spending — failed. He promised massive tax cuts — failed that too.

The President needs a win, and he might have a chance with NAFTA.

Robert Lighthizer, the US trade representative, gets his marching orders from Trump. Canada’s foreign minister Chrystia Freeland gets her direction from prime minister Justin Trudeau. Advantage USA.

The US wants:

• modernise or create provisions that protect digital trade and services trade, e-commerce, update customs procedures, protect intellectual property, improve energy provisions, enhance transparency rules, and promote science-based agricultural trade.

Canada wants:

• A new chapter on gender rights and a new chapter on Indigenous rights.

Somehow, the fact that it is a trade negotiation is lost on Canada.

Advantage: USA.

The US wants:

• A reduction in huge trade deficits, asking for balance and reciprocity. They want higher NAFTA content in autos and auto parts.

Canada wants:

• A new chapter on environmental standards. Again, Canada appears blissfully unaware of the definition of trade.

Advantage: USA.

The US wants:

• Equal access and reciprocity in government procurement and agriculture.

Canada wants:

• Protect Canada’s supply-management system for dairy and poultry. Canada does not have free trade in these areas and regulates imports and prices.

Advantage: USA, mainly because it is an easy concession for Canada to make, to win something else.

The US wants:

• Dispute settlement provisions should be designed to respect national sovereignty and democratic processes. Essentially, the US wants their legal to rule on trade disputes.

Canada wants:

• To keep the current process

Advantage: unknown.

There is more, but it does seem that President Trump’s policy of "Tweeting loudly and threatening with a big stick" gives the US an edge. If so, it may limit Canadian dollar gains, at least until the September central bank meetings begin.

The week ahead

At least there’s President Trump to stir the pot. Otherwise, this would probably be a week epitomizing the dog days of summer.

Monday will start quietly and then get progressively quieter until the New York close. The slated economic data is all third-tier.

Tuesday won’t be much different in Asia. Europe could be a little livelier with the German and Eurozone ZEW surveys on tap. In New York, the main data release is housing starts which isn’t much. Canadian retail sales are also due.

Wednesday looks to be another quiet one in Asia. Europe heats up a bit with a series of preliminary Markit manufacturing and services PMIs and the UK inflation report hearings. New York offers up more housing data, and Markit PMI reports.

On Thursday, New Zealand’s trade report and Japan’s leading economic index may could create some trading activity. It is also the first day of the Fed’s Jackson Hole symposium, billed as "Fostering a Dynamic Global Economy." UK GDP and business investment data should keep GBPUSD traders busy. The US data (jobless claims and home sales) will be non-events.

On Friday, Japanese CPI is the highlight in Asia. Europe will be busy dealing with German GDP and IFO reports. The US releases durable goods orders.

The week that was

On Monday, Asia breathed a sigh of relief when no nuclear missiles landed anywhere at the weekend despite the fiery exchange of words between Trump and North Korea. Safe-haven trades were unwound, and the US dollar drifted higher the entire day. Weaker-than-expected China data, which included industrial production and retail sales, weighed on the Antipodeans, and, by mid-morning in the US, on oil prices as well.

Japan recorded stellar second-quarter GDP growth, but it only had minimal impact on trading.EURUSD peaked at 1.1837 in the European morning session. Eurozone industrial production was a tick lower than forecast and had nothing to do with the EURUSD slide to the New York close of 1.1788. Oil prices got spanked after the options expiry time in New York, dropping 2.4% partly due to the soft China data and the modestly firmer greenback. Traders appeared to ignore New York Fed president William Dudley saying that he favours of another rate hike in 2017 if the data supports it.

On Tuesday, Asia traders thought Dudley was on to something, and they bought dollars. USDJPYopened with a bid at 109.62 and climbed steadily to 110.46 by the New York open. AUDUSDrallied on the upbeat minutes from the Reserve Bank of Australia’s meeting, but the move didn’t last.

GBPUSD traded with a negative bias in Asia. Prices dropped further on the release of UK retail sales, PPI and CPI and a smattering of Brexit headlines. GBPUSD fell to 1.2875 from an overnight peak of 1.2968. EURUSD was uneventful in Asia, but bounced in a 1.1721- 1.1780 range after a bump in German GDP. Oil prices dropped 3.6% after China reported a decrease in crude imports for July. US retail sales led a parade of upbeat economic releases and kicked off a dollar buying frenzy in New York. The greenback finished the day with gains across the board.

On Wednesday, the dollar demand from the New York session extended into Asian trading. AUDUSD rallied steadily from the opening low of 0.7817 to 0.7867. USDJPY merely consolidated Tuesday’s gains. In Europe, better than expected Eurozone GDP had EURUSD bouncing in a 1.1697-1.1757 range. UK unemployment reached a 44-year low. Sterling didn’t. GBPUSD rallied to 1.2901 from 1.2843.

Chaos reigned in New York — well, Washington really. President Trump fired all his advisory manufacturing panel members to avoid the embarrassment of them resigning. Oil prices tanked despite the US Energy Information Administration reporting a significant drop in crude inventories because gasoline inventories did not fall. The Federal Open Market Committee’s minutes of its July meeting were interpreted as dovish, and the USD was sold. It ended the day down against the majors, except for sterling, which was flat.

On Thursday, in Asia, the fall-out from the FOMC minutes was fleeting. AUDUSD rallied, getting an additional boost from a 27,900 rise in employment, while NZDUSD mirrored AUDUSD moves. USDJPY found a bottom in Asia.

In the European session, UK July retail sales beat expectations, but downward revisions to the June data drove the currency down to 1.2861 in early New York trading. EURUSD’s rally after the FOMC meeting minutes from 1.1692 peaked at 1.1789 in Europe and dropped to 1.1703 by the New York open. That was despite reasonably upbeat trade and inflation data.

The New York session was loopy. EURUSD extended losses when the European Central Bank’s minutes showed concerned about the high level of EURUSD, but the move didn’t last. EURUSD rallied. USDJPY dropped further when a terrorist attack in Barcelona sparked risk-aversion. The commodity bloc currencies were hammered, and AUDUSD was the worst-performing currency.

On Friday, mild risk-aversion rippled across Asia and Europe. The US opened with small losses against everything, except the Swiss franc, which was flat.

It’s been another bumpy week at the White House. Photo: Shutterstock

— Edited by John Acher

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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