This article looks at international trade deficits, NAFTA and the Canadian dollar
There is far too much scepticism about a NAFTA deal. We understand it, because Trump has caught market players wrong-footed on several occasions in the past year.
There is no doubt that Trump’s action on the international trade are driven by political motives than economics. He’s wrong about how trade deficits work and he’s wrong about all kinds of numbers. The deficit with China isn’t $500 billion (it was $337 bn last year), and that with Canada is much closer to zero than the $17 billion he often mentions. But that’s all beside the point. Even if Trump’s numbers were accurate, the deficit with Canada remains a drop in the bucket and a trade war with Canada doesn’t play to his base.
A battle with Mexico might play better but NAFTA is a three-way agreement so it’s all or nothing. If there were two separate deals, Mexico would be in trouble. Mexico should be sending Canada flowers…free of any tariffs. As it is, NAFTA trade isn’t the US’s big problem, nor is the solution. Trump knows it, despite the rhetoric.
Mexico Caravan Theatre
Have you ever heard of an illegal immigrant caravan going through Mexico before? If you’re like us, the first time you ever heard of it was this week, sometime after Trump tweeted about it. Evidently this is an annual tradition that normally involves about 300 people. This year, the tally reached 1000 so it’s somewhat notable. But keep in mind that there are 11 million illegal immigrants in the US and about 42,000 enter per month, and another 20,000 attempt entry but are detained.
So all the fuss is about the 1000 is nothing but theatre. More aptly, a sham for Trump to flex his military muscles and a set-up for a NAFTA deal.
Mexico will most likely break up the caravan, especially that most riders come from Honduras, hence, there’s no big electoral pay for Mexican politicians at home.
At the same time, Mexican officials will release a few token statements about stopping illegals through Mexico, while Trump can declare victory, thus combining it with a NAFTA announcement next week.
What’s next for USD/CAD?
Things are already lining up for a bounce in the Canadian dollar (further declines in USD/CAD). A NAFTA deal appears to me as 80% done, while markets are estimating it around 50/50. Technically, there is a textbook head-and-shoulders top in USD/CAD, arguing for 1.25 as the next landmark target. The x-factors are the stock market and China. We can expect a short reprieve after the White House said it has nothing more planned at the moment, while Trump’s economic team shifted mode to damage control on Wednesday. Finally, let’s not forget that April has been the strongest month for the Canadian dollar over the last 20 years.
