After a year of tense and extremely public negotiations Mexico, Canada and the United States have reached an agreement to modernize NAFTA. With more than 1,800 pages the USMCA (aka US, Mexico, Canada Agreement) is a daunting document. Details and consequence remain uncertain (initial reviews say that US has improved in some areas but weakened in others). The headline takeaways are positive, however. Yes, US demands previously considered "non-negotiable" were reworked, but the US was able to keep steel and aluminium and added agriculture tariffs, while Canada and Mexico were able to secure cover from auto tariffs. Although the details might end up damaging specific sectors of the individual countries, the overall result should be positive for Canada and Mexico. Firstly, it removes a huge uncertainty risk. Secondly, after a period of extreme trade tensions the US neighbours have now secured clear trading rights. This is major advantage for the global supply chain.
The MXN (Mexican peso) should further stabilize and mostly outperform its LATAM peers. USMCA will allow US and external domiciled corporates to "hide" in Mexico and this suggests that the MXN should gain from US trade war escalations but also from broad risk appetite. In addition, high yields will naturally attract investors. Finally, political uncertainty is fading after the uneventful Mexican presidential election. On the other hand, USD trade is on life support. The Fed rate path is broadly priced in and a political storm in the form of the US midterm elections is coming.
By Peter Rosenstreich
