Ditching Nafta
Trump ditching nafta.

Goldman Sachs thinks the U.S. will Ditch Nafta, sinking the Peso and Loonie

Goldman Sachs analysts expect the U.S. to announce its intention to ditch naftra and to pull out of the North American Free Trade Agreement with Canada and Mexico, a move with the potential to throw the Mexican peso and Canadian dollar for a loop.

An announcement is likely in the next few months, wrote Goldman economists Michael Cahill, Karen Reichgott and Mark Ozerov in a note on Wednesday. They expect the move because some U.S. demands are still no-gos for its trade partners, and common ground appears scarce.

For currencies, this would spell volatility.

Against the Mexican unit USDMXN, the Goldman analysts expect the dollar to shoot up to 20-21 pesos, compared with 18.8985 pesos in Wednesday trading, should their U.S. trade-policy uncertainty index climb back to where it was immediately after last year’s presidential election.

“When we also consider the commensurate rise in political risk this would entail, which already seems to be weighing on the currency to some degree, then 22-24 still seems reasonable,” they said. Mexico’s general election is scheduled for next year.

The Canadian dollar USDCAD, would likely react to a lesser extent than its Mexican counterpart, given it has been less sensitive to the uncertainty surrounding the renegotiation of the pact because its main drivers also include cyclical factors and monetary policy. The U.S.-Canadian dollar pair “could rise around 6% under the same scenario to about C$1.35, although the range of uncertainty is greater,” they said. On Wednesday, one dollar bought C$1.2785.

ditch nafta
US to ditch nafta

In the longer term, economic growth is the main consideration, given that trade agreements are generally designed to improve growth and productivity.

“If we assume that Canada and Mexico productivity were to fall by 10% relative to U.S. productivity—likely over a period of several years—then the dollar-peso and U.S-Canadian dollar fair value estimates would rise from 15.4 pesos to 15.9 pesos and from C$1.20 to C$1.24,” Cahill, Reichgott and Ozerov wrote.

Meanwhile, the U.S. might hope for the peso to appreciate in a post-NAFTA world, as Mexico would apply higher tariffs on U.S. exports than the U.S. would apply to Mexican exports without the overwriting tariff rules of Nafta. This “would worsen the U.S. trade balance with Mexico […] unless the Mexican peso appreciated,” the analysts said.

For Canada and the U.S., tariffs would be roughly the same.

The next round of renegotiation talks is scheduled for Jan. 23-28 in Montreal and “key sticking points will be back on the docket,” compared with the last meeting, which was of a more technical nature and appeared more constructive, the analysts said.

“For now, U.S. Trade Representative [Robert] Lighthizer looks willing to let the talks fail unless he can secure major concessions,” they wrote. “While we expect the rising odds of tax reform to put less pressure on the trade agenda, we do not expect passage of tax reform will raise the odds of a successful Nafta renegotiation, so a withdrawal announcement looks more likely than not even if tax reform is enacted soon.”