Morning Commentary: 2 Before 1

Foreign Exchange - Morning Commentary
2 Before 1
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
When it comes to trade deals, the narrative over the past couple months has been for a completion of the Phase 1 deal between the US and China.  However, as we pointed out in one of our publications last week, it now appears that USMCA (aka NAFTA 2) could also be crossing the finish line, possibly before the Phase 1 deal. 

Earlier this morning, news headlines indicated Congress is nearing a deal to pass a modified U.S. trade agreement with Canada and Mexico.  However, obstacles such as the Democrat’s concerns over the enforcement of labor rules still remain.  As a reminder, Democrats who supported the original NAFTA deal in 1993 did so over the opposition of many labor groups. 

This likely cost the party support and was one of the reasons union workers in Pennsylvania, Wisconsin and Michigan voted for President Trump who promised to renegotiate the deal.  As a result, labor union support will be an important factor as this appears a prerequisite to gain enough Democratic support for the deal.  Certainly the headlines this morning are a positive, but the muted reactions from the CAD and the MXN reflect the fact that negotiators have been close before only to see things fall apart; there are also impending central bank meetings (Fed and ECB), the UK election and the December tariff deadline all scheduled for later week. 

Speaking of tariffs, there really isn’t much to add.  Clearly with less than a week to go before tariffs are scheduled to go up, pressure on negotiators has risen.  While there have been some recent indicators that a deal could be close, confusion remains over how close they truly are given the volatile nature of negotiations and numerous outstanding issues.  Additionally, the passing of the “Uygur Intervention and Global Humanitarian Unified Response Act” and the “Hong Kong Human Rights and Democracy Act” adds another level of complexity.  Overall, we continue to believe that a Phase 1 deal ultimately gets signed, but there is an increasing likelihood that this doesn’t happen until next year with the two sides finding a reason to delay the December tariffs. 
  • The GBP has continued its rally this session with polls continuing to show an increasing likelihood of a Conservative majority.  While a Conservative majority is seen as a positive, we do note a couple of points.  A Conservative victory eliminates a cancellation of Brexit, which is the most positive result.  Additionally, only a transitional deal has been agreed to.  A trade deal (the more difficult deal) still remains to be negotiated and still leaves open the possibility of a hard Brexit despite the passage of a withdrawal agreement.   
  • Germany’s trade data came in better than expected with exports rising 1.2% vs expectations for a 0.3% decline and imports coming in flat vs expectations for a 0.1% decline. 
  • Chinese trade data came in weaker than expected.  While imports grew 0.3% vs expectations for a 1.4% decline, exports fell 1.1% vs expectations for a 0.8% increase. 
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