NAFTA Deal
Donald Trump successfully concluded his first trade deal re-negotion and both the President and the markets seem equally pleased with the result. Trump in his victory speech turned his attention to Canada and its Prime Minister Justin Trudeu, to express his intent of fully restoring the NAFTA partnership. The name of the agreement itself, however, will likely remain a thing of the past, as his latest US-Mexico deal took the form of a bilateral trade agreement.
The US Senate has 90 days to approve the agreement before it can be ratified. Mexico may turn out to be a new frontier for the sale of US agricultural products, allowing the administration to keep up the pressure on China.
Euphoria
News of the trade agreement between the US and Mexico has caused US indices to soar. The Dow rose by more than 1% with the NASDAQ and S&P not far behind. The Australian exchange mirrored this optimism, boasting a 0.57% growth. Asian indices on the other hand only showed a slight increase. Meanwhile the commodities market was also on the upswing, the front runners being precious metals and energies futures.
USDCAD
Disagreements between Trump and Trudeau were at their height in April, when the US levied tariffs on imported steel and aluminum, without exempting its northern neighbor. The Canadian Prime Minister had already raised objections to the US pulling out of NAFTA and the added tariffs on steel and aluminum only added insult to injury. At this point personal relations between the two heads of state are at their lowest, however, both of them recognize the value in the economic cooperation of their respective countries. The US-Mexico agreement puts a great deal of pressure on Prime Minster Trudeau, since it demonstrates that Trump is indeed open to negotiating. Although over the past few months Canada has gotten closer to Europe politically, the USA’s proximity and market size continues to bind the two countries economic interests together.
These mixed relations are reflected in the two countries’ respective currencies. From the beginning of the conflict, the CAD’s weakening has been the defining trend. This trend peaked around the end of June, at which point the Canadian dollar turned around and started strengthening. In this pairing 1.2950 is considered a key price level and it has been acting as a persistent line of support since early June. Following the announcement of yesterday’s deal, the CAD strengthened by 80 pips, only coming to a halt at 1.2950. With the rising pressure, the line may very well break in the near future. Should that happen, the closes line of support for the USDCAD would be the 1.2740 line.
Light Sweet Crude Oil
The price of oil has been on the rise and the earlier worries about oversupply have now been replaced with concerns about production. Oil price has been affected the sanctions on Iran and the country’s subsequent threats to retaliate by closing the mouth of the Read Sea, as well as the situation in Venezuela and several conflicts in Africa. On top of foreign policy reasons, the Organization of Petroleum Exporting Countries (OPEC) also weighed in by announcing that the reduction of production by its members (and Russia) exceeded its previously agreed target by 9%.
On August 16 the price of WTI reached it’s 64.43 minimum, however since then it’s been gradually rising all the way to 70 dollars. Fundamental analysis suggests this increase will continue, especially in November when the sanctions against Iranian oil go into effect. The $70 line may be a psychological barrier first and foremost, while from a technical analysis perspective there is still room for oil to rise higher. As a result of how gradual the increase has been, oil is not showing any sings of being overbought, despite rising by 5 dollars in only 6 trading days. API and EIA will release their respective crude oil inventory reports today and tomorrow. Following last week’s 5 million barrel decline, this week analysts expect an increase of 0.5 to 1 million barrels, which does little to justify a major price correction. Due to the uncertain political situation, at this point the oil market favors traders who use fundamentals rather than those who rely on technical analysis.
Sincerely,
Laszlo | Market Analyst
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