US-Canada Nafta deal lights up Canadian dollar, Mexican peso

Tokyo — The Canadian dollar and the Mexican peso rose and Japanese shares hit fresh 27-year highs on Monday, after the US and Canada reached a framework deal to update the North American Free Trade Agreement (Nafta).

A Canadian source confirmed the two countries reached a deal, with Canada agreeing to a side-letter arrangement effectively capping vehicle exports to the US.

Japan’s Nikkei rose as much as 0.8% to climb a tad above the 27-year high reached on Friday, and it ended the morning session 0.6% ahead.

US stock futures gained 0.5%.

Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities, said Nafta was Washington’s second largest trade issue, after China.

“Investors will likely view the latest agreement positively, a sign that trade disputes are easing outside China-US talks,” he said.

MSCI’s broadest index of Asia-Pacific shares outside Japan was softer, falling 0.15%. Regional volumes are likely to be light, due to holidays in China, including Hong Kong.

Casting a shadow in Asia, two surveys showed on Sunday that growth in China’s manufacturing sector sputtered in September as domestic and export demand softened.

The private Caixin/Markit factory purchasing managers index (PMI) fell to 50, the lowest reading since May 2017, in a stark reminder that the trade disputes are starting to have real consequences for the economy.

“The escalation of trade tensions between the US and China recently has likely weighed on purchasing managers’ sentiment as reflected by softer readings in trade-related sub-indices,” wrote economists at Bank of America Merrill Lynch.

“Deterioration of PMI in September is in line with our expectation that coincident growth indicators will get worse before getting better.

“As US-China trade conflict intensifies, we expect China’s policymakers to step up monetary and fiscal easing to soften the blow from higher tariffs,” they said.

In Japan, the Bank of Japan’s tankan survey showed business confidence among Japan’s big manufacturers has worsened in the September for three quarters in a row — for the first time since 2008/09.

The world’s share markets had rallied in September on hopes that China and the US will eventually work out a deal on trade, but plans for talks around the end of the month collapsed after the two sides launched more tit-for-tat tariffs.

MSCI’s broadest gauge of the world’s shares covering 47 markets rose for the third straight month in September.

In the currency market, the Canadian dollar rose more than 0.5% to a four-month high of C$1.2814 to the US dollar .

The Mexican peso also gained, rising more than 0.6% to 18.54 per dollar, its highest since early August.

As risk appetites improved, the yen softened 0.2% to ¥113.96 per dollar, its lowest since mid-November 2017.

The euro was hit by worrying about a rise in Italy’s fiscal deficit after the Italian government agreed to set a higher than expected budget deficit target that could put Rome on a collision course with Brussels.

The common currency traded at $1.1608, having lost 1.2% last week and off three-month high of $1.18155 touched a week ago.

Oil prices gained, with international benchmark Brent hitting a four-year high, as US sanctions on Tehran squeezed Iranian crude exports, tightening supply even as other key exporters increased production.

Brent crude futures rose 0.6% to as high as $83.25 a barrel, the strongest level since November 2014.

Reuters