Article / 18 May 2018 at 12:30 GMT

The deadline was missed but there's still wiggle room for a Nafta deal

FX Trade Strategist /
  • FOMC minutes from May 2 meeting highlight a dull week
  • Oil prices and ongoing Nafta talks will underpin Canadian dollar
  • US Treasury yields continue to be key focus for FX markets and USDJPY

By Michael O'Neill

US House Speaker Paul Ryan’s May 17 deadline for a new North America Free Trade Agreement (Nafta) came and went without any fanfare. Hiram Johnson, an American politician from 1911-1945, said: “the first casualty of war is truth.” He could have been referring to the Nafta renegotiations. 

At any given time during the seven rounds of negotiations, there wasn’t any shortage of conflicting reports and rumours. There were reports of a US/Canada bilateral pact, talk that the automotive component issues were resolved. On Wednesday, there were reports of an imminent deal. Canada and Mexico would agree to higher US auto content if the rest of the agreement remained in place.

On May 10, USDCAD plummeted from 1.2840 to 1.2730 when Ryan said that he needed notice of a Nafta deal by May 17, to give the 2018 version of Congress time to review and vote on the deal. To many traders, it was a sign that a deal was ready to be inked. That view was reinforced on news that Canada’s prime minister flew to Washington on Tuesday, to help seal a deal. It didn’t happen.

On deadline day, US trade representative Robert Lighthizer said: “the Nafta countries are nowhere near close to a deal.” He pointed out that there were big differences on intellectual property, labour, energy and agriculture. On the same day, Canadian prime minister Trudeau said “we are close to a deal. We are at the point where there is a good deal on the table.” Obviously, Lighthizer and Trudeau weren’t at the same meetings.

USDCAD did not react to the passing of the deadline. The Nafta negotiations are ongoing, and Paul Ryan said that there was a couple of weeks of “wiggle room” for the talks to conclude and still give Congress time to vote.

USDCAD is locked inside a 1.2700-1.2930 trading range and is likely to stay in that range at least until the June 13, FOMC meeting. 

 The Canadian dollar is supported by:

1) Ongoing speculation of a favorable resolution to the Nafta renegotiations, which should help the Canadian dollar for the next two weeks.

2) Oil prices are at 3½-year highs. Prices are expected to stay at elevated levels, supported by US/Iran tensions and the threat of new sanctions, and Opec reports that oil oversupply issues have been remedied.

3) Bank of Canada governor Poloz adopted a modestly upbeat outlook in a speech earlier this month, keeping a July rate increase on the table.

4) The risk of a nasty US/China trade war has ebbed with the ongoing trade negotiations.

Canadian dollar negatives include:

1) Rapidly rising US Treasury yields which could trigger renewed speculation for three more US rate increases in 2018.

2) The risk that China/US trade talks collapse risking “tit-for-tat” tariffs.

3) The risk that the Nafta negotiations fail, leading to the US levying tariffs on Canadian exports.

4) A steep drop in oil prices, which would remove some of the Canadian dollar’s cushion against a strong US dollar.

Chart: USDCAD 4 hour highlighting trading band

 Source: Saxo Bank

The week ahead 

It is going to be a short week for Canada, Denmark, Germany, Switzerland and France and a dull week for everyone. The data barrel isn’t empty but it is serving up the dregs. US Durable Goods Orders information is released on Friday, but it also the start to a US long weekend, which suggests a quiet end to the week as well.

Wednesday may be the liveliest day of the week at least as far as EURUSD and GBPUSD traders are concerned. Eurozone consumer Confidence and Markit Manufacturing PMI reports are tabled. The UK answers with PPI, CPI and DCLG House Prices. The Federal Open Market Committee minutes from the May 1-2 meeting are released.

Fortunately, President Trump’s twitter account is still active. US Treasury yields, China/Trade developments, drama around the North Korea/US summit and the ongoing NAFTA talks will provide the diversions.

The week that was

Monday: It was a quiet start to the week, exacerbated by the lack of economic releases in the three major FX centers. EURUSD ignored reports of a possible 5 Star/Northern League coalition government in Italy and EURUSD opened in New York near the top of its 1.1941-89. Sterling was content to see-saw in a 1.3543-95 band. USDJPY flirted with resistance in the 109.60 area. US dollar bulls took control around the 1500 GMT New York option expiry time and the dollar closed on a firm note boosted by 10-year US Treasury yields probing 3.0%

Tuesday: The Asia session and European morning sessions were dull. AUDUSD traded down to 0.7605 after the Reserve Bank of AUstralia meeting minutes confirmed Australian interest rates would hold at 1.75% for a long time. GBPUSD didn’t get any lasting benefit from the UK employment report data. Eurozone ZEW and GDP data were in line with forecasts. Rising US Treasury yields led to USDJPY probing 110.00. In New York, Business Inventories and NY Empire State Manufacturing Index were firmer than forecast. That led to a surge in 10-year Treasury yields which touched 3.089%. EURUSD crashed, GBPUSD collapsed, and USDJPY rallied. The day ended with US dollar gains across the board.

Wednesday: FX trading was less frantic in Asia. USDJPY chopped about in a narrow range, supported by weak Q1 GDP data. AUDUSD was lifted by a bout of profit taking when Wage Price data met expectations. Eurozone inflation data didn’t surprise anyone. Italian politicians suggesting the European Central Bank should forgive €250 billion in debt, raised some eyebrows. GBPUSD was weighed down by negative Brexit stories. The US dollar opened in New York on a mixed note and ended the session the same way. US economic reports were not an issue and it appeared that 10-year US Treasury yields at 3.098 % was “old news” due to the lack of follow-through US dollar buying.

Thursday: FX markets were choppy but ultimately directionless, in Asia and Europe. AUDUSD got a bit of positive traction from a mildly positive employment report but quickly skidded off the road. It opened on a negative note in New York. USDJPY climbed as Treasury yields rose. 10-year Treasury yields peaked at 3.122 while the 30-year bond touched 3.256 by the close of the New York session. EURUSD and GBPUSD were bid inside the previous day’s ranges despite reasonably upbeat US economic reports. There were not any fresh headlines from China/US trade talks. The NAFTA deal deadline came and went. The US dollar closed with tiny gains against the commodity currency bloc and was flat against the rest.

Friday: The US dollar closed the week on solid footing with the rally fueled by a steep rise in US Treasury yields. The Japanese yen dropped 1.5%, followed closely by the euro which was down 1.3%

Chart: US dollar change from May 11 close to 1130 GMT on May 18
Source: IFXA

Michael O’Neill is an FX consultant at IFXA Ltd

John Shaw John  Shaw
Looney sure got stomped on this morning bud.
Michael O'Neill Michael O'Neill
CPI and Retail sales were well-off the mark, catching traders short USDCAD. A July rate hike was 100% priced in according to OIS. that may get downgraded.
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