The US dollar continued where it left off on Friday, weakening across the board overnight, while US Treasury yields were modestly higher; the NZD is up only slightly from Friday’s close

By Nick Smyth

The S&P500 and NASDAQ set new highs overnight after the US and Mexico said they had reached a trade understanding for a deal to replace NAFTA.  The US dollar continued where it left off on Friday, weakening across the board overnight, while US Treasury yields were modestly higher.  The NZD is up only slightly from Friday’s close. 

The big news overnight is that the US and Mexico have reached an understanding on trade, setting the stage for a new free-trade agreement to replace NAFTA.  The deal agreed by the US and Mexico would last 16 years and be reviewed every 6 years.   Canada, the other participant in NAFTA, has been side-lined through the US-Mexican trade talks and will now re-join the negotiations in the hope of finalising a deal between the three countries.   While Mexican president Enrique Pena Nieto said he was “quite hopeful” that Canada would join the agreement and that negotiations could be concluded this week, Trump said “we’ll see” in reference to Canada joining the deal.  If a deal cannot be negotiated between the three sides, Trump didn’t rule out a separate, bilateral deal with Canada.  There are reportedly still a number of sticking points between the Canada and the US that would need to be overcome for a deal on a revised NAFTA to be reached. 

The US-Mexico trade understanding and Trump’s recent announcement that he would hold off on tariffs on the EU while the two sides pursued a trade agreement represent some good news on the trade front.  They also demonstrate that the President can backtrack on previously hostile rhetoric.  It looks, however, like Trump is focusing his attentions on China, with the public consultation on his proposed $200b of tariffs on Chinese imports set to end on September 5th, and no signs of a breakthrough there. 

Nonetheless, the US-Mexico announcement set the scene for a further increase in US equities, with the S&P500 following on from its record high on Friday with a 0.8% increase.  The NASDAQ was up 1% as it broke the 8,000 barrier, on its way to a new record high.  The risk-on tone also helped US Treasury yields rise, with the 10 year yield up 4bps to 2.85%, reversing the move after Fed Chair Powell’s speech on Friday.  There was no major economic data released overnight

The Canadian dollar and Mexican peso strengthened after headlines emerged that the US and Mexico had come to a trade agreement.  The peso is around 1% higher while the CAD is 0.5% stronger on the day, despite uncertainty over whether Canada and the US will be able to resolve their differences on trade.

The USD is weaker across the board again, with the DXY and BBDXY around 0.4% lower on the day.  The USD indices hit a one-year high just a fortnight ago, but the recent reversal has seen both the DXY and BBDXY track back into the ranges that were established between May and August.  CFTC data over the weekend highlighted that speculative investors were holding ‘long’ positions in the USD in aggregate, and the combination of a US-Mexico trade truce, China taking more active steps to stabilize the CNY, and what was seen as a dovish speech by Fed Chair Powell have probably conspired to drive some unwinding of those positions. 

FX market activity was fairly light given the UK Bank Holiday, but the NZD has moved modestly higher as it flirts with 0.67.  The focus for the local market this week is the ANZ business survey which is released on Thursday.  NZ swap rates moved up by around 1bp yesterday as the market continues to consolidate after the RBNZ MPS, and rates should extend those gains somewhat today in light of the overnight moves. 

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