NAFTA: USD/CAD will move on headlines but is not as vulnerable as MXN - Rabobank

Christian Lawrence, Senior Market Strategist at Rabobank, explains that CAD and MXN are sitting at the bottom of the pack in terms of FX performance both overnight and over the past week and the fourth day of the fourth round of NAFTA negotiations highlighted that discussions are becoming increasingly difficult.

Key Quotes

“Our base case is that NAFTA will not be terminated but it is a risk that cannot be ruled out.”

“We expect volatility in USD/MXN to pick-up heading into year-end and as such, we expect USD/MXN to head higher. USD/CAD will move on headlines but is not as vulnerable as MXN.”

“Looking forward Round 5 of the negotiations will be held in Mexico City in early November and we are of the view that MXN is likely to remain on the back foot as we head into year end. Indeed, our end of year forecast for USD/MXN currently stands at around 19.50 although should talks sour substantially during round 5 then we could be looking at a 20 handle much sooner.”

“A look at the daily USD/MXN chart shows resistance at 19.2956 which coincides with the highs from back in April. Above there, the psychological 20 handle comes into play before prior support at 20.13 becomes resistance.  The next level to look at to the upside beyond there is the all-time high of 22.0385.  In terms of support, the 200 day moving average that USD/MXN recently traded through should turn to support at 18.9596 and below there we would highlight likely support at 18.4614. In terms of momentum, figure 1 shows that we remain in neutral territory in terms of Rabo’s  Daily Momentum Model but with the RSI in overbought territory we should keep an eye on any dip in that indicator.”

“Turning to USD/CAD, it is interesting to note that the latest release of CFTC data showed net speculative longs are at the most stretched levels seen since October 2012. These data are for the week up to Tuesday 10th October and we are likely to see some paring back of positioning in the next set of data due for release on Friday. Despite this, these data do still tell us a story; the market is largely long CAD and given diminishing expectations with respect to further rate hikes from the Bank of Canada this year, we could still see some further unwinding of long CAD positioning provide support for USD/CAD.  That said, we expect the BoC to retain a hawkish bias heading into 2018 and foresee USD/CAD trading back down to 1.23 as we head into 2018.”

“In terms of USD/CAD daily technicals, we are currently in neutral territory with the September bull run stalling. The 50 day moving average at 1.248 should offer near term support before 1.2414 comes into play. Below there is weak support at 1.237 but if we see a continued move lower then there are no major support levels until 1.2111 and 1.2062. Below there it is the 1.20 handle that will be the main focus. On the upside, look for resistance at 1.2563 before the 1.26 level comes into focus.”