The Canadian Loonie and Mexican Peso jumped late on Tuesday after a report by the Globe and Mail that the U.S. government has dropped a demand that all vehicles made in Canada and Mexico for export to the United States contain at least 50% U.S. content.
President Donald Trump's administration dropped the demand during the North American Free Trade Agreement negotiations in Washington last week, which included talks between Canada's Foreign Minister Chrystia Freeland and U.S. Trade Representative Robert Lighthizer, the Canadian newspaper reported.
Autos have been one of the biggest sticking points in the talks, and Washington had originally demanded both the 50% U.S. content requirement and jacking up an existing requirement for North American content from 62.5% to 85% . Canada and Mexico flatly rejected the U.S. content demand, since it would give the United States a guaranteed economic advantage over its North American trading partners.
Canada's ambassador to Washington, David MacNaughton, said on Tuesday that meetings over the past two weeks "have been more positive than I've seen them before.
"I can say in all honesty that there has been substantive progress made, certainly on the auto side," he told a conference of the American Association of Port Authorities at a Washington hotel. "I am confident that we are going to move forward. I hope we can do so as quickly as possible."
Freeland's chief spokesman declined to comment on the report and said Canada and United States continued to work well together, while Canada's Prime Minister Justin Trudeau said earlier this week that Trump appeared to be "enthusiastic" about coming to an agreement on NAFTA.
At the conclusion of the last formal round of negotiations, in Mexico City earlier this month, Mr. Lighthizer said he wanted an agreement in principle in four to six weeks. One source with knowledge of the talks said the three sides are rushing to reach a deal by the end of April, before Mexico's presidential election campaign begins in earnest.
Prime Minister Justin Trudeau hinted earlier this week that talks were speeding up.
"We're renegotiating NAFTA, we've seen from the President he's enthusiastic about getting to a deal," he said.
The United States backing off its harshest demand would make the path to a deal much easier. "If true, that would be a very strong indication that we're in deal-making mode," said Flavio Volpe, president of the Automotive Parts Manufacturers' Association of Canada.
The biggest beneficiary from the news were the two NAFTA currencies with both the Loonie and Peso surging in response; UBS said that while MXN is undervalued and also pinned by very high real policy rates, UBS isn’t currently long the currency, noting that "Political risks are a factor here,” he says. “We find much better value in rates than in the currency."
Some have speculated that Trump is easing off on his NAFTA demands to double down on the far more important trade war with China to be unveiled this Friday, and where Trump hopes to build a united trade front of nations who have been similarly impacted by China's trade surplus.