Market Extra: Here’s what’s next for Nafta, Mexico’s peso and Canada’s dollar

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Mexico, Canada and the U.S. were expected to reach a deal in principle on the renegotiation of the North American Free Trade Agreement in May. Now that it’s June and a deal is nowhere to be seen, analysts wonder what’s next for these trade partners and their currencies.

What’s more, political uncertainty may hang up the trade talks even more. Between the November mid-terms in the U.S. and Mexico’s presidential election, there was a lot of uncertainty about the climate Nafta 2.0 would be born into.

Talks to rejig Nafta began in August last year, first in an attempt to wrap up a better version of the trade pact by December, a target that also came and went.

And on Thursday — the last day of May — the U.S. said that previously announced tariffs on steel and aluminum imports, affecting a myriad of trade partners including Mexico and Canada, would come into effect Friday.

The U.S. is the world’s largest steel importer by 2017 numbers, according to the Department of Commerce, with Canada supplying the biggest amount and Mexico in fourth place. Ottawa is set to challenge the tariffs at the World Trade Organization, and is expected to, along with Mexico and the E.U., retaliate against U.S. products.

Read: Here’s what steel and aluminum tariffs on U.S. allies mean for the metals market

“The news sparked renewed worries about protectionism especially among the U.S.’s closest North American trading partners and all but eliminated hopes that ongoing Nafta negotiations could be resolved this month,” said Omer Esiner of Commonwealth Foreign Exchange on Friday.

Canada’s dollar USDCAD, -0.0386%  dropped more than 1% between Thursday and Friday, and Mexico’s peso USDMXN, +0.1512%  hit its lowest level since early 2017 following the news. The buck last bought C$1.2962 and 19.9496 pesos, having strengthened against both the currencies on this week.

Still, Mexico’s economy minister Ildefonso Guajardo told local press that the trade negotiations would carry on. The likelihood of reaching a deal by July 1, when Mexico holds its general election, however, is getting less and less likely. This means the headline-prone talks, the political posturing and the swings in the related currencies are due to continue.

“I think it is extremely unlikely that we’ll get a deal before the [U.S.] mid-terms [in November],” said Said Haidar, president and CEO of Haidar Capital Management. Plus, the real question remains what the congressional makeup will look like afterwards, he added.

Even after a deal is agreed to it would take months until it is actually voted on by the respective governments and finally implemented.

“I wouldn’t anticipate anything being agreed on or voted on by Congress until the first quarter of 2019,” said Michael Diaz, head of FX for online platform XE.com.

The frontrunner for Mexico’s top post is Andres Manuel Lopez Obrador, commonly referred to as AMLO, who is a left-leaning newcomer and founder of his own party. The unknowns he brings have been weighing on the peso.

“Amlo isn’t exactly Mr. Free Trade himself, either,” said Haidar, in reference to the candidate’s suggestion that he would stop awarding private oil contracts and halt the privatization of the electricity sector.

Meanwhile, emerging markets currencies have generally been falling out of favor somewhat, as U.S. Treasury yields have crept up, leading investors to refocus.

Canada doesn’t have an election coming up, but the trouble around Nafta, paired with the fresh trade restrictions, are giving investors much to think about. Even though the standard GATT (General Agreement on Tariffs and Trade) duties wouldn’t be has high as the metals tariffs, there would still be implications for the Canadian economy, albeit more manageable.

Earlier this week, the Bank of Canada sounded bullish on its economy, while mentioning trade as a source of potential worry, which pushed the Canadian dollar higher. This led market participants to foresee a potential summer rate hike from the BOC, following in the footsteps of the Federal Reserve. Now that seems less obvious.

“For the BOC, the uncertainty created by sanctions on Canadian goods could make it more cautious going forward,” said Gary Kerdus, global payments executive for XE.com.