USD tumbles amid improving risk sentiment
After losing ground against most of its peers yesterday, the US dollar paused on Tuesday as market participants re-evaluate whether there is further dollar weakness ahead. The dollar index fell more than 2.4% in the past two weeks amid easing trade tensions with China and positive developments with Mexico. The initial move was triggered by President Trump’s intervention a couple of weeks ago, when he expressed his dissatisfaction with the Federal Reserve’s current hiking cycle, saying he was “not thrilled” with the Fed raising rates and that the central bank should help him boost the economy. As the Mexico deal has neared closing, Trump said it was “not the right time to talk” to China, but now he says China wants to talk.
Investors started to load risk again, which send the greenback to monthly lows. EUR/USD climbed to 1.17 this morning, the highest level since 1 August. The pair is testing the 1.1709 resistance level (Fibonacci 38.2% on January 2017 – February 2018). A break out of the latter would open the road towards the next resistance at 1.1851 (high from 14 June), then 1.1960 (200-day moving average).
Will US–Mexico deal derail the Canadian dollar?
US President Donald Trump is saying that the North American Free Trade Agreement (NAFTA) should be renamed the United States-Mexico trade agreement. American-Mexican bilateral talks initiated last month are coming to an end, putting pressure on Canada to sign or resign from the 24-year-old treaty. Canada must return to the negotiation table, and this will not be a loonie-positive.
Mexico finally agreed to US terms: 75% (62.50% in NAFTA terms) of auto content should be built on US soil, while being exempt from tariffs along with a minimum wage of $16/hour insured for 40%-45% of total US auto parts workforce. Canada is expected to counter-offer on this, paving the way for further talks. Since July, USD/CAD remained above 1.2950, but a strong bounce above 1.32 cannot be ruled out in coming days. Currently trading at 1.2955, USD/CAD is expected to strengthen slightly, as hope grows that Canada will accept current terms – we think this is unlikely.
