Morning Commentary: NAFTA becomes USMCA

Foreign Exchange - Morning Commentary
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After nearly three years of back and forth negotiations, USMCA has finally replaced NAFTA.  In an ironic twist of fate, USMCA is coming into force amid a global economic crisis.  As a reminder, NAFTA was implemented just a few months before the Tequila Crisis broke out in Mexico in December 1994.  

Overall, the spirit of NAFTA and the legal framework to ensure compliance to the rules remains in USMCA.  Yet it is important to note that there are important differences between the agreements that could make implementation bumpy especially regarding labor and national content rules.  

US lawmakers and unions pushed for Mexico to accept increased oversight of Mexican factories.  In the case of disagreements, a dispute panel would conduct inspections.  Further, US lawmakers asked for the labor reforms passed by Mexico in 2019 to be fully implemented by the signing of USMCA.  With Mexico’s Supreme Court expected to hear cases challenging the constitutionality of the labor reforms, expect the US to closely monitor developments and for labor to represent a possible point of contention.  

Further, rules of origin and national content in auto production have been key issues throughout the renegotiation process.  Under NAFTA, national content was set at 62.5% and will be moved up to 75% under USMCA.  Additionally, 40% of vehicle content needs to reflect wages of at least $16.  Under the current economic environment, meeting these standards represents a challenge.  Lingering concerns also remain on intellectual property and pharmaceutical issues.  

Another change is the timeline of the deal with USMCA up for reassessment every six years.  This condition helps to keep the agreement up to date and more accurately reflects the economic conditions in all three countries.  However, the corollary to this is that the review process also raises the risk that any country can potentially exit the deal.  

Overall, USMCA is a positive, but there still remains work to be done for these benefits to fully materialize.  
  • US jobs data delivered another upside surprise.  Yesterday, US ADP employment data came in better than expected, and there was a massive upwards revision to last month’s number.  Today, the government’s jobs report beat expectations coming in at 4.8 million against expectations for a 3.2 million print.  Additionally, last month’s number was revised up to 2.7 million from 2.5 million.  The unemployment rate also dropped to 11.1% from 12.5%.  Conversely, initial jobless claims and continuing claims remain elevated as they came in at 1.4 million and 19.3 million, respectively.  While the last two non-farm job reports have been fantastic, questions remain over sustainability as government programs supporting jobs fade and we move past the initial re-opening bounce/re-openings have been paused due to rising infections.      
  • New US cases topped 50,000 for the first time ever with jumps in Florida, Texas and California.  New York and California have either delayed or banned some indoor activities such as indoor dining.  Texas and Arizona have also seen increases in hospitalization rates.  Outside of the US, Japan has seen an uptick in infections in Tokyo while the UK is preparing for “Super Saturday” when pubs, restaurants and hotels will re-open.  On the vaccine front, Pfizer and BioNTech have received positive results from early trials.  
  • Yesterday’s Fed minutes showed discussion around the need for stronger forward guidance that is either outcoming-based (i.e. inflation at a certain level) or calendar-based.  On balance, the preference appears to be for calendar-based guidance.  The Fed also discussed yield curve control, although between the two, the preference appears to be for stronger forward guidance.  
  • The US House of Representatives passed a bill that imposed sanctions on businesses that do business with Chinese officials involved in the crackdown on pro-democracy demonstrators in Hong Kong.  
  • Russia joined Saudi Arabia in delivering OPEC+ production cuts for the second month, however Russia has stated it is too early to discuss extending cuts.  Additionally, Putin won a vote on his bid to extend his two decade run in power. 
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