(Bloomberg) — Mexico’s peso and Canada’s dollar dropped after reports the U.S. may pull out of the trillion-dollar trade pact that President Donald Trump has threatened to dump if it doesn’t favor his nation.
Both currencies pared losses after a White House official said there hasn’t been any change in Trump’s position on Nafta. The peso fell 0.5 percent to 19.3398 per dollar as of 3:04 p.m. in New York, after falling as much as 0.9 percent. The Canadian dollar slipped 0.6 percent to 1.2543 per dollar. Yields on Canadian government 2-year notes fell six basis points to 1.74 percent.
Canada believes there’s an increasing likelihood that Trump will give six-months’ notice to withdraw from the two-decade-old pact, according to two Canadian government officials who spoke on condition of anonymity. Canada is said to have begun preparing contingency plans for how to proceed if Trump gives a withdrawal notice, which isn’t binding and wouldn’t necessarily kill Nafta.
“If the news report gets more confirmation — other sources or U.S. officials, something like that — then the peso’s weakness could be sustained and extended,” said Danny Fang, a New York-based analyst at Banco Bilbao Vizcaya Argentaria SA. “For the Canadian dollar, it’s a similar story.”
Here are what other analysts had to say:
Juan Carlos Rodado, New York-based head of research at Natixis SA
- “If true, this is honestly a bomb for the Mexican peso,” he said
- “We have three options: a deal, which is more unlikely given the timeline; a break-up; or potentially postponing the negotiations as the Mexican political cycle kicks in. Options two and three are both negative for the peso”
Says trend for Mexican peso is weakness until July 1 with Nafta noise adding to election uncertainty
Shaun Osborne, chief economist at Bank of Nova Scotia
- “Nafta comments a bit of a reality check for BoC tightening expectations at least” he said
- “There’s more upside likely here considering that Nafta risks is one major uncertainty that could keep the Bank of Canada on the sidelines near-term. Upside risk to 1.2650/1.27 in the next week or so technically”
Bipan Rai, a strategist at Canadian Imperial Bank of Commerce
- “The Nafta headlines are from unknown government sources – and I have a hard time seeing how the BoC would alter its thinking based on something that’s not official. There might be some palpable concern at the Bank, but these headlines wouldn’t and shouldn’t add to the fire”
- “In regards to the CAD, its high time we had some Nafta premium priced in. Markets have been far too complacent about termination risk for too long and outside of the BoC meeting next week, could see some upside pressure as we head into the next round of negotiations”
Erik Nelson, a New York-based currency strategist at Wells Fargo (NYSE:)
- “Markets are approaching this headline with caution until there are more concrete signs of a possible Nafta exit by the United States”
- Move from 17.50 to nearly 20.00 in recent months has to some extent reflected markets pricing in a greater probability of an unfavorable Nafta outcome, according to him
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