NAFTA – Yes or No?

Last week

Earlier in the week, markets were optimistic when US President Donald Trump announced the free trade agreement with Mexico. The so-called Free Trade Agreement, NAFTA, includes the US, Mexico and Canada. Donald Trump considers current trade relations between countries to be unfair and disadvantageous to the United States and is therefore opposed to a new similar agreement. The US stock indices, particularly the Nasdaq and the S&P500, also boosted their gains following the agreement.

As far as NAFTA is concerned, Canada has not agreed with its US neighbor on free trade conditions. The condition for the implementation of the treaty is the agreement of all three North American neighbors. Trade talks between Canada and the US should have been concluded by the end of the week, but it ended in failure when the Canadian side rejected the US administration's proposals. The Canadian Foreign Minister has said that there will be no new NAFTA deal if it doesn’t favor Canada. The same has already been said by Trump and the situation seems to be at a standstill. Canada is now dependent on trade with the United States, where the vast majority of Canadian exports are heading. Another negotiation on NAFTA is scheduled for this week when it could be clear whether one of the North American neighbors will retreat.

The European Statistical Office, Eurostat, published the result of an annual comparison of the CPI inflation index and figures that inflation in the euro area declined from its previous 2.1% to 2.0% growth. The goal of the European Central Bank is to keep the inflation level just below two percent. Inflation is one of the key indicators for the ECB when deciding on the next monetary policy. This year, the ECB is ending its quantitative easing program, which has stimulated inflation and economic growth. Eurostat also reported the unemployment rate in the European Union, which fell to 6.8% in July, the lowest since the financial crisis in 2008.

The end of the week brought back the strength of the US dollar, as President Trump once again influenced it’s volatility. Trump revealed that the proposed changes by the European Union on the import tariffs for cars are not profitable for the US and also said that the option of introducing tariffs on the German Volkswagen, BMW and Mercedes-Benz cars is on the table. These statements are not in line with the agreement he has concluded with European Commission President Jean-Claude Juncker about mutual efforts to cut off all tariffs between the US and the EU. Donald Trump is uncompromising in his efforts and threatened to withdraw the United States from the World Trade Organization. This situation favours the currencies of the safe havens and thus strengthens the US dollar, the Japanese Yen and the Swiss Franc.

European Union main negotiator for Brexit, Michel Barnier, has announced he is ready to offer the United Kingdom an extraordinary agreement, like no one else. This surprising boldness promptly boosted British Pound. Not long after, however, Sterling consolidated and began to lose more than half of its gains after reports were released that the EU-UK agreement is unlikely to reach the agreed deadline in October, but perhaps in November. Theresa May ended her visit to Africa, and in response to the Brexit developments, she said that her cabinet was in no way to call for another referendum on the departure of the Kingdom from the EU. Many reputable institutions warn of a No-Brexit deal.

This week

From this week, global markets and stock trading are back to full-time power after the summer period. This is often characterized by lower volatility due to the holiday season as well. Over the past few weeks, however, relatively interesting activity across markets has been seen, especially as investors were responding to developments around geopolitical situations and tensions of trade wars. New major macroeconomic reports return to us this week. On Monday, lower volatility is expected across the board as banks in the United States and Canada will be closed because of a Labour day bank holiday.

On Tuesday morning CE(S)T we will see the interest rates decision in Australia. These are at 1.50% for two years now. It is also expected that Reserve Bank of Australia will not incline to any moves in rates this time. The Australian economy is doing well, unemployment rate is very low and wages are rising. Also, the last result of the Trade balance was surprisingly good. Together with the announcement of the interest rate, the RBA will release a Rate statement which may have a major role. It will be important to monitor any comments related to trade relations.

In Australia, another two major fundamentals, quarterly GDP, and Trade balance will be published on Wednesday and Thursday. Both are projected for a weaker drop compared to the previous results, and both reports will be relevant only for the next RBA's meeting to determine additional monetary policy. Trade relations with China and the introduction of tariffs will be projected in the next GDP report. This result reflects the second quarter of this year.

United Kingdom PMI reports. As always, at the beginning of the month, sector indexes of purchasing managers are to be released in the UK. This week, a decline is expected in the Manufacturing sector and in the Construction sector, which has not been significant for the currency movement for a while. However, the most important sector of Services is expected to have a slight growth. In the previous release, this report disappointed expectations, especially due to the Brexit negotiations.

Interest rates in Canada will be released on Wednesday, and this time there is no change expected. Rates are now at the same level as in Australia after the Bank of Canada has made the last increase in July. Governor Poloz and the bank board are now following the Fed's footsteps, which is also currently in the hiking cycle. Since the last BoC press conference, hawkish tones have been heard, despite warnings about the development of an agreement with the US on import tariffs and negotiations around NAFTA.

The deadline for negotiations between China and the US to avert the introduction of further import tariffs will halt on Thursday. The talks officially started two weeks ago, and they have not had any results yet. At present, customs taxes on $50 billion of goods are now fully in place for both sides. But this time, the stakes are high as the Chinese side is trying to prevent the introduction of $200 billion expansion for goods imported to the US from China. Due to the trade imbalance gap between China and the US, China would suffer severely from these US restrictions. China no longer has many opportunities to respond reciprocally and has therefore announced that it will make it harder for US companies to conduct business in China.

A report from the labor market in Canada will be released on Friday and, in parallel with the unemployment rate, it is expected to see a decline compared to previous results. In July, a lot of new jobs were added, but most of them were seasonal jobs that weighed on a decrease in a full-time jobs. The negative result was also seen in the wages that had fallen compared to the previous two months.

The US NFP. An important fundamental release from the United States concludes a week together with the announcement of the Canadian job report. In the US, the NFP is expected to be increased in the number of newly created jobs in the non-farm sector, by 191k new jobs. Unemployment rate and wages are now expected to remain unchanged. Investors will be primarily focused on wages, but if these stagnate, the focus will shift to any difference in new jobs. This NFP report is the last one before the FOMC interest rate decision scheduled by the end this month. It is advised to avoid trading this report in parallel with the Canadian dollar as both currencies can react chaotically.

Scheduled Geopolitical events

  • The Argentinian government will publish a package of economic measures to respond to the problems of depreciation of its own currency.
  • For the first time, a new Parliament will convene in Iraq.
  • Foreign Ministers of Brazil, Chile and Colombia will meet to address the migration crisis and the exodus of the Venezuelan population.
  • US Secretary of State Mike Pompeo will visit Pakistan on Wednesday. US-Pakistan relations are currently highly escalated.
  • German Foreign Minister Maas visits Turkey.
  • On Friday, the Eurogroup countries meeting takes place.
  • On Friday, Turkish President Erdogan and Russian President Putin will visit Iran's President Rouhani in Tehran to discuss the situation in Syria.

For FTMO,

Pavel Dusek