NAFTA deal revives risk-on sentiment

2 October, 2018

Investors have entered into the final trading quarter with a renewed appetite for risk after Canada agreed to join the United States and Mexico in a trilateral trade deal over the weekend.

Global equity markets powered higher on this positive development, while the Canadian Dollar and Mexico peso both soared to fresh multi-month highs. With the new United States-Mexico-Canada Agreement (USMCA) seen as a breath of fresh air to markets, “risk-on” could remain the name of the game in the short term. However, market sentiment remains gripped by ongoing US-China trade tensions in the medium to longer term. Any fresh signs of trade tensions escalating between the world’s two largest economies could dent investor confidence and erode risk appetite.

In the currency markets, the Japanese Yen was a clear casualty of the “risk-on” mood with the currency depreciating to levels not seen November 2017. An appreciating Dollar rubbed salt into the wound with the USDJPY trading towards 114.00 as of writing. With investors likely to offload the shun the Japanese Yen for riskier assets and the Dollar supported by rate hike expectations, the USDJPY could trade higher. In regards to the technical picture, a solid daily close above 114.00 could send the USDJPY towards 114.50.

The Canadian Dollar bulls were unstoppable today mostly due to the NAFTA optimism with the USDCAD crashing towards levels not seen in over 4 months below 1.2800. With the CAD heavily supported by higher oil prices and expectations over the Bank of Canada raising interest rates this month, the USDCAD could potentially sink towards 1.2700 and beyond. Investors will continue to closely observe if bears are able to secure a solid weekly close below the 1.2800 level.

Gold traded in the background with prices bouncing within a modest range despite investors offloading safe-haven assets for riskier investments. The yellow metal may remain on standby ahead of the US jobs report on Friday. Daily bears remain in control below the $1200 psychological level with $1181 acting as a near-term bearish target.

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