Menu

Search

Menu

Search

FxWirePro: Crude’s bearish sentiment may append insult to NAFTA injuries that likely to lead resumption of loonie and peso vulnerability

G3 currency pairs are locked into painfully tight ranges, with political developments in NAFTA, New Zealand, and Turkey behind the biggest FX moves.

The broad dollar was swung around by a number of conflicting Fed appointment headlines as well as ongoing drip-feed of fiscal news, but the net result has been little fresh directionality. Thus other currencies are moving more idiosyncratically with other regional political and policy developments, especially against the backdrop of a range bound dollar.

Meanwhile, recent NAFTA headlines have put US trade protectionism back on the front burner.  But even a US hard-liner stance on some issues and ominous threats to pull out of the trade pact, the news and headlines of the past week has given us a little new indication of whether the US is exercising aggressive negotiation tactics or displaying ideological inflexibility. But what has become clear, with the announcement of an extension and slowing of the negotiations, is that threat to trade disruption was not an acute risk this past week, and NAFTA should continue to fade as a near-term FX driver.

While the lingering downside risks of crude oil prices could pressure CAD further The US has made difficult demands in the NAFTA negotiations with Canada and Mexico.

With growing concerns about NAFTA's future, weakness in both the MXN and CAD is extending, with these currencies tending to re-correlate when the market focuses on trade agreement risk, like after Trump’s election and more recently (refer above chart).

It is recommended shorts in ZARMXN but we reckon that still-bullish MXN positioning, coupled with NAFTA uncertainty, may limit MXN gains. According to the CFTC, CAD long positions spiked this summer to reach their highest level in five years, suggesting unwind risk on revived tensions and the likely BoC status quo next week.

Oil prices are near the top of their two-year range, so we think that investors should favor hedging further CAD weakness given oil downside risks. BoC expectations should no longer boost the CAD, with a hike in 1Q’18 already mostly priced in, plus another hike by end-2018. Courtesy: SG

  • Market Data
Close

Welcome to EconoTimes

Sign up for daily updates for the most important
stories unfolding in the global economy.