On January 1, 2019, NAFTA will turn 25 years old, leaving us wondering whether or not it will make it to 26. NAFTA 2.0, officially known as USMCA, was signed by Mexico, Canada and the US at the G20 meeting in Argentina last November but still requires legislative approval from all three countries in order to officially replace NAFTA. For this to happen, numerous hurdles need to be overcome, and this is where the risk of delay comes in.
In the US, the main obstacles are the divided Congress and trade tensions with China. While on first blush trade issues with China seem unrelated to NAFTA 2.0, there is a growing consensus that lawmakers want to prioritize talks with China. March 2, 2019 is now the deadline for which tariffs will rise from 10% to 25%. Between now and then, the focus is likely to be on China which would delay NAFTA 2.0 committee meetings.
In Canada, parliamentary elections are scheduled for October. While NAFTA 2.0 has been agreed to, steel and aluminum tariffs (S&A) remain in place. Both Mexico and Canada have been pushing to have these tariffs removed and no real progress has been made. It is quite possible that S&A tariffs reemerges as a point of contention, delaying ratification.
Additionally, Mexico still has work to do in order to modernize its labor laws up to the level agreed upon in the USMCA. With the current legislative session ending on Monday, discussions around changes to Mexico's labor laws won't begin until the new session starts in February.
Ultimately, we see the ratification of NAFTA 2.0 in 2019, but there are enough risk factors out there that could delay NAFTA 2.0’s ratification allowing NAFTA 1.0 to reach its 26th birthday.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
There are no major central bank meetings this week.
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
New Home Sales
Expectations for a gain from 544k to 568k
Expectations for a gain of 180k
Expectations for a decline from 59.3 to 57.9
U.S. Jobs Report
Expectations for a gain of 185k; UR to remain at 3.7%
Canada Jobs Report
Expectations for a gain of 10k; UR ticks higher to 5.7%
EZ Manufacturing PMI
Expectations for an unchanged print of 51.4
German Jobs Report
Expectations for unemployment to drop by 13k
U.K. PMI Manufact.
Expectations for a decline from 53.1 to 52.5
Asia/Japan, and New Zealand
China PMI Mfg.
Expectations for unchanged at 50.2
Japan PMI Mfg.
Expectations for unchanged at 52.4
The EUR continues to remain trapped between $1.1500 to $1.1300 since the middle of November despite all the emotional upheaval in equities, interest rates and commodities. We expect more range trading with a bias toward a slightly stronger EUR. Expect more consolidation ahead until Friday when the US Jobs report is released.
The GBP too continues to consolidate like the EUR but with a downward bias predicated on all the uncertainty surrounding the upcoming Parliament vote on Brexit (week of January 14th) and PM May's standing within the Tory party. Expect more sideways trading this week.
The JPY and CHF were the top performing major currencies this past week. Markets seem to be unwinding short currency positions in the face of lower US interest rate expectations despite US equities correcting higher. This is unusual given the history and correlation of “risk-on” and “risk-off” relationships between safe haven currencies and bears to be monitored as a possible shift in market dynamics as we enter a New Year.
The CAD has been the weakest performing major currency this past two weeks falling by nearly 2% and one of the weakest since the beginning of October falling by nearly 5.65%. Weaker oil prices and dovish messaging from the Bank of Canada are at the heart of the weakness. RBC believes we are near the top of the range near 1.3600/$; we agree and look for consolidation this week and an improving tone in the New Year.
The CNY has been in a broad and consolidative pattern since August despite all the sharp global equity and interest rate movements. Chinese economic data continues to indicate a slowing of the economy, but the Chinese authorities remain proactive through monetary and fiscal policy. We continue to expect more consolidation ahead.
The AUD remains one of the weakest major currencies of 2018 down by nearly 10% and remains pinned down near YTD lows. Weak commodity prices, a dovish central bank, a strong U.S. dollar and on-going concerns about future Chinese growth impacting Aussie exports are at the heart of the currency weakness. Expect consolidation this week.
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