- The U.S. Senate approved the USMCA
- Mexican economy expected to recover on the back of the new trade deal
- USD/MXN may hit levels below $18.00
Following the U.S. Senate’s approval of the United States-Mexico-Canada Agreement (USMCA) trade deal, Mexico export companies expect a record year. As a result, USD/MXN printed a fresh 1-year low $18.65.
Fundamental analysis: USMCA to boost economy
Auto part manufacturers are expecting regional input to increase substantially although the new rules targeting car makers are stricter than before.
“It’s good news because this agreement will generate confidence in Mexico for the arrival of investment, for companies to set up here, and for jobs with good salaries,” said Mexican President Andres Manuel Lopez Obrador in a video posted on Twitter.
The new USMCA, initiated by president Trump, the 1994 North American Free Trade Agreement (NAFTA). As a result, Mexico’s auto parts industry association (INA) said it expects three Chinese companies to move to Mexico.
“It’s really important, because this will help to boost the numbers in terms of autoparts output,” said Alberto Bustamante, INA’s foreign trade chief.
INA now expects sales in 2020 to exceed $100 billion from $99 billion recorded in the previous year. The rebound is much needed as car sales and exports fell last year, in line with the rest of Mexican economy, which was on the brink of recession.
“It’s very good news. And it does give added certainty to investors and exporters,” Kenneth Smith, Mexico’s lead trade negotiator from 2017-2018 stated.
The new provisions that are included in USMCA, on behalf of president Trump, set stricter rules and will provide big challenges for Mexican car makers. For instance, the USMCA now requires that 40% of a light vehicle and 45% of a pickup are manufactured in the areas that pay workers at least $16 an hour.
Moreover, manufacturers are now obliged to purchase North American steel and aluminum.
“It’s going to be hard work with our suppliers to meet the new rules, especially the steel and aluminum requirements and the labor content value,” said Miguel Elizalde, head of the Mexican association of heavy vehicle makers, ANPACT.
Technical analysis: Room for more gains
Following the agreement approval, USD/MXN hit the lowest levels since October 2018. More importantly, the bears took the price action below key technical indicators, such as Fibonacci retracements, weekly moving averages, triangle, as well as the 4-year supporting trend line (the blue trend line).
The bears are now aiming for $18.50 as their next target. Looking more in the mid-term, the $17.95 is seen as the next level of support, should the peso continue to gain. On the upside, the $19.00 mark represents major resistance for the bulls.
Following the new trade agreement between the United States, Canada, and Mexico, which replaced the old NAFTA, the Mexican peso has made important gains. The pair is now primed for more losses as Mexican economy expects to benefit from the new agreement.