The trade agreement reached between the U.S. and Mexico made the headlines on Monday. The news sent the S&P 500, the NASDAQ Composite, and the Russell 2000 to new record highs. The Dow Jones Industrial average broke above 26,000 for the first time since February and is currently 567 points away from its January record high.
The U.S. – Mexico deal seemed to boost confidence that the trade war is moving closer to an end, and the next question is who’s next to close a deal with Trump? Global trade tensions have undoubtedly been the most significant source of risk in 2018. It led to massive falls in emerging market currencies and sent Chinese equities into a bear market after $2 trillion were wiped off their value.
Although investors finally see the light at the end of the dark tunnel, when it comes to China the tunnel may prove to be too long with lots of bumps along the way. However, it’s Canada what investors will be watching next.
The dollar which gave up 2.3% from its 14-months high will continue to retreat lower if Canada manages to secure a similar deal this week. But if negotiations fail there’s a high chance that traders return to king dollar, and the surge in risk appetite will be short-lived.
Although most Asian stocks traded higher following Monday’s Wall Street performance, mainland China stocks fell back into red territory with Shanghai composite and Shenzhen indices retreating slightly. This suggests that neither the U.S. – Mexican deal nor PBOC’s efforts to put a floor on the CNY managed to attract investors. The latest announcement by China’s central bank to reintroduce a “counter cyclical factor” to determine the renminbi’s exchange rate is aimed to stabilize the currency after it fell for nine straight weeks since mid-June. However, with the economy continuing to gradually slow, government pushing for deleveraging, and ongoing trade tensions with the U.S., it’s more likely to see a weaker currency longer term. That’s probably why the PBOC’s move was not enough to encourage investors to buy risk assets.
The economic calendar is relatively light today, so expect currency traders to continue taking the cue from equities performance and any update on U.S. trade negotiations with Canada.
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