STUCK IN THE MIDDLE

Despite Trump’s Nafta threats, the Canadian and Mexican currencies are trouncing the US dollar

Obsession
"America First"
Obsession
"America First"

Donald Trump seems to take delight in toying with Mexico and Canada over the fate of the North American Free Trade Agreement (Nafta).

While campaigning, the US president called Nafta the “worst trade deal ever made.” Once in office, Trump said he would try to renegotiate rather than scrap the agreement. His positions have seemed to shift a few times since; a week ago, he was back to threats to scrap the free-trade pact entirely. Staying true to his “America First” policies, Trump wants to put pressure on the country’s neighbors—two of its three largest trading partners— to eliminate their trade surpluses with the US, and also make Mexico pay for a wall along its northern border.

However, as a round of renegotiation talks wrap up in Mexico today, markets don’t seem to take Trump’s threats very seriously. The Canadian dollar was up 0.4% against its US counterpart at the time of writing, after reaching it’s highest level since mid-2015 at the end of last week. Meanwhile, the Mexican peso gained 0.6% on Tuesday against the greenback. These are not moves to suggest that either country is about to lose privileged access to its biggest export market.

Since Trump’s inauguration in January, Mexico and Canada’s currencies have gained 21% and 8%, respectively, against the US dollar. An index of the dollar against its major trading partners has declined for six consecutive months, the longest such streak in 14 years.

While movements in currency markets aren’t a surefire predictor of how the trade talks will turn out, they certainly provide pleasing optics for the countries currently receiving Trump’s ire. Traders have been buying the loonie after data showed Canada’s economy grew at a robust annualized rate of 4.5% in the second quarter—compared with 3% in the US—and the central bank in Ottawa continues to raise interest rates. Meanwhile, the peso has long been immune to Trump’s threats about trade, the wall, and much else. What’s more, Mexico’s central bank just upped its forecasts for the local economy (paywall).

“The [US] dollar is ending summer like it began it: making new lows after another inflation and payrolls disappointment, anxiety over Washington issues, and struggling against currencies of cyclically outperforming economies with central banks shifting towards normalization,” JPMorgan currency strategists wrote in a recent note. At the end of last week, short bets on the dollar—traders taking positions that assume the currency is more likely to fall than rise—are the largest they have been since January 2013, according to Reuters.

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