The Week Ahead: NAFTA Is No More - New Trade Deal Breaks Trade Deadlock

Market News & Blog /
01 Oct 2018


Its trade we speak about yet again but this time it's due to a trade deal rather than tariffs. Finally, over the weekend Canada and the US reached an agreement that will change the market outlook for the week. 



Once again, trade will be the major focus for markets this week after Canada finally came to an agreement with US and Mexico to scrap NAFTA and replace with the new United States, Mexico and Canada Agreement (USMCA). The details are still a little skectchy but it seems that according to President Trudeau “This is a good day for Canada”. The Dollar has seen a little more downside in recent weeks as risk appetite seem to have returned, at least for now and this agreement has seen it come under a little more pressure.

Last weeks Fed rate hike pointed to the fact that Jerome Powell, the chairman of the Federal Reserve was ready to continue to increase interest rates, with many of the opinion that means December this year. With the US jobs report due this week, investors will be looking for further signs of a strong labour market to confirm a December rate move.

The key data points to watch this week are US September Institute for Supply Management Manufacturing, non-manufacturing and the labour market report due Monday, Wednesday and Friday respectively. For the non-farm payrolls, we look for below-consensus (160K vs consensus 188K) and average hourly earnings at 2.8%YoY.



Political risks are key for Europe this week, with continued issues from emerging markets and now from the Italian Budget. Italy’s financial situation shows stark and worrying similarities to that of Greece during the Eurozone crisis of 2011. With Italian bond yields dictating Euro direction last week and dragging banking shares lower, we expect a similar situation next week.

Last week’s agreement of a higher budget deficit in Rome will likely dominate the horizon for the Euro but there will also be a focus on the domestic macroeconomic data. The budget and constant bickering over the final numbers have the ability to derail this already rocky coalition government. Any further headlines will worry investors and put the Euro under more pressure.



The big risk for Sterling this week is the Tory party conference – a pivotal one for Prime Minister Theresa May, who speaks on Wednesday. While many expect the PM to come out fighting it is difficult to ignore the potential downside risks stemming from UK politics in the week ahead. The pound has traded down on the last two speeches at the party conference by Theresa May. We cannot ignore that Brexit could lead to another tough day for PM May and in turn a tough time for Sterling.

As far as domestic data goes, we have the UK Purchasing Manager Index’s due for release, which will be a focus as output is going to be a key driver of economic performance over the next few months. However, we cannot overlook the fact that negative Brexit sentiment is the primary driver for Sterling in both the near and medium term outlooks.



Trade rears its head yet again for the Loonie this week after an agreement was finally reached between the US, Canada and Mexico. The new United States, Mexicao and Canada Agreement (USMCA) has been well received by the Canadian dollar with big gains taking many pairs to levels not seen since spring. The USMCA details will continue to be the biggest risk as we wait to see if there are any more surprise concessions from Donald Trump.

We can now add the resumption of trade talks to the hawkish comments from the Bank of Canada last week. Many will now expect to see some key upside this week, especially after Governor Poloz effectively guaranteed a rate hike at the October meeting. Probability is now up above 80% for this rate hike.



The debate at the October Reserve Bank of Australia meeting on Tuesday will centre around how officials balance solid domestic activity and ongoing external risks such as Trade Wars and emerging market contagion. Since the last meeting, we have seen Q2 Australian Gross Domestic Product beat expectations - while employment growth bounced back after a summer lull. The escalation in the US-China trade war and the ongoing global trade uncertainties remain a huge issue for currencies such as the Aussie dollar.

In terms of Australian data, the focus will be on the retail sales data for August released on Friday. There will also be readings on trade data on Thursday and September Purchasing Manager Index’s Tuesday and Thursday.



Last week's Reserve Bank of New Zealand meeting saw few surprises as the central bank remains certain that its forward guidance points to no movement in rates for the foreseeable future. There is very little due for release on the domestic front next week, however, keep an eye on the Global Dairy Trade auction after a slump in dairy prices recently.


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