A further slowing in growth
There’s been a swift market response to a possible understanding between the US and Mexico to replace NAFTA, helping the Canadian Dollar as well as the Peso.
Risk sentiment was given a further leg up overnight with the news that the US and Mexico had agreed on a trade deal to replace NAFTA. Sticking points over the automotive sector have been resolved while duty free access for the agriculture sector. The President sealed the deal in an Oval Office conference call with Mexican President Enrique Pena Nieto, President Trump then calling on the Canadians to also re-negotiate. Not losing an opportunity, Canadian Foreign Minister Freeland is cutting short her current trip to Europe and flying to Washington Tuesday. These agreements still need to be ratified by Congress.
While Mexican President Nieto said he was “quite hopeful” that Canada would join the agreement and that negotiations could be concluded this week, Trump said “we’ll see” in reference to Canada joining the deal. If a deal cannot be negotiated between the three sides, Trump didn’t rule out a separate, bilateral deal with Canada. President Trump said that the deal(s) would no longer be known as NAFTA but as free trade agreement(s).
News of the trade deal provided more positive background news for investor sentiment, stocks also getting a boost from the tailwinds of Fed Chair Powell’s comments Friday that he sees no sign of the economy overheating, continuing in essence the goldilocks US economy.
Recall that on the US-China trade front, September 5 is looming. That is the date when the consultation ends on the threatened 25% tariff on an additional $200bn of Chinese imports. That’s next Friday. Last week’s mid-level US-China officials’ talks in Washington did not resolve the issue.
With risk sentiment back on in size, Powell’s sentiment-soothing comments and emerging market stresses into the background for now, the USD has been further on the defensive, the USD down by around 0.4%, the DXY back below 95 as all major crosses made some gains against the USD. Top of the pops over the past 24 hours was initially the Mexican Peso, though it’s given back some of its intra-day gains. The Canadian dollar is also higher, by 0.5%.
The AUD has been grinding only a little higher, still consolidating the in the 73s, with no new local AUD-specifics to give it new direction and the CNY relatively steady. Following the announcement that the People’s Bank of China was re-introducing a Counter-Cyclical Factor for the Chinese renminbi (rather than automatically mirror the USD), a weaker USD has seen little net change in the USD/CNY. After moving lower through much of the APAC session late last week and yesterday, the AUD/CNY has been clawing back some ground.
Global bond yields inched higher with equities rallying, the German and US 10 year yields up by 3-4 bps, the US 10 year Treasury yield up 3.6bps to 2.8459%. AU bond futures have followed overnight. On the commodity front, the UK was out for a bank holiday and so no LME trading. There was little new direction among the Aussie bulks. Oil and gold benefited from the weaker USD.
The Euro has been near the front of the move higher against the USD, aided by a solid reading from the German Ifo Business Survey for August revealing better than expected readings. The headline Business Climate index rose from 101.7 to 103.8, pointing to a measure of growth stability in the German economy after some choppier industrial data of late. Last week’s Composite German PMI in August rose from 55.0 to 55.7, also stronger than expected.
There was little data to trouble the economic scorers in the US, the Dallas Fed Manufacturing Survey in August remaining buoyant at 30.9 (it’s centred on zero, not the PMIs 50 growth breakeven level), buoyed by higher oil/shale oil activity and sentiment.
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