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The US and Canadian authorities managed to iron out their differences and pave the way for Canada to join the preliminary trade agreement reached by Mexico and the US a month earlier, and meeting a soft deadline to deliver the legal text for a tripartite deal by Oct 1. This effectively paves the way for the successful realization of a renegotiated modernized NAFTA, which will now be called the US- Mexico-Canada Agreement (USMCA). Negotiations were successful as both sides compromised on long standing and at times seemingly intractable issues, with the US agreeing to largely keep the important trade dispute resolution mechanisms embedded in NAFTA’s Chapter 19 (now Chapter 10 in the new agreement) intact while Canada agreed to grant the US partial access to its dairy market.
While the macro impact of what has exactly changed from legacy NAFTA to USMCA may be less material, the act of striking a deal has broad, material implications for markets, given the degree to which it reduces uncertainty around the tail risk scenario of a regime collapse of such a large trading region.
Beyond, helping ensure a high chance that earlier basic NAFTA tariff and regulatory regimes will remain in place, the outlook around other tariff risks is also considerably improved, as the US has now committed to exempt Canada in addition to Mexico from potential future auto tariffs, subject to a quota system. Meanwhile, steel & aluminum tariffs are still being levied against both Mexico and Canada, but finalizing the USMCA should potentially pave a road for the three states to address this issue more directly (including potential quotas on steel & aluminum exports in exchange for tariff exemption).
Investment outlooks should be bolstered too given that the NAFTA sunset clause was significantly watered down and guarantee at least 16 year of certainty. Finally, given that our base-case scenario was, and remains, a trilateral deal will eventually be signed into law, the risks around our economic forecasts seem more balanced with less uncertainty a potential upside. Courtesy: JPM
Trade tips: Buy 3M USDCAD 25D call vs sell USDRUB 25D call, in 1.8:1 vega. Oil hedged EM – DM vol compression RV with NAFTA edge.
In our previous post, we recommended buying a 1m 1x1 USDMXN call spread and we now like to roll over this strategy (spot ref: 18.9150 strikes: 18.4010, 19.3850) vs selling the 25-delta put (strike: 19.3850).
Currency Strength Index: FxWirePro's hourly CAD spot index is inching towards -64 levels (which is bearish), while hourly USD spot index was at -53 (bearish) while articulating (at 11:42 GMT). For more details on the index, please refer below weblink:
