US Stimulus Has Profound Impact on Mexican Peso, Canadian Dollar
US stimulus programs totaling in the billions of dollars may be better for Canada and Mexico than they are for the United States. The three interconnected NAFTA countries’ currencies are booming in tandem to each other, with each rallying to nearly the same degree.
No Surprises in the Currency Markets
As the US and Candian Dollars as well as the Mexican Peso rally together, investors should be hardly surprised they’re all benefiting equally from stimulus enacted within US borders. The Canadian dollar has gained 5.9% while the Mexican Peso has added 3.7% against a similar increase in the US dollar index in the first few months of the year. Analysts contest US stimulus is driving demand for goods produced in Canada and Mexico, two of the United States’ largest trading partners. Due to the stimulus, this is the first time since 1998 all currencies have rallied together.
Euro Trouble
While North America wades in an ocean of artificial stimulus, the European Union and its currency are impacted heavily from the high debt loads of Spain and Greece as well as a worsening recession. The Euro was one of the biggest losers against the dollar, shedding 5.7%, and helping to send the US dollar index to a higher high against a basket of world currencies.
Independent Action
One of the biggest benefits to the North American nations is that each, through its own central bank and currency, can enact stimulus programs to fit their needs. On the flip side, the European Union’s efforts are broad-based, across borders and do not target the individual needs of their member nations. As a result, stimulus efforts in Europe are sending healthier economies into huge growth swings while suffering nations such as Spain and Greece lack the stimulus needed to bring GDP back in the black.
NAFTA’s Affects
Much of the economic ties between Canada, the United States and Mexico come from NAFTA, or the North American Free Trade Agreement. Under the agreement, enacted under the Clinton administration, the barriers of trade between Canada, the US and Mexico were largely lifted, allowing for all nations to trade and benefit equally. Of course, the lesser developed nation, Mexico, is perhaps the biggest benefactor, with the Peso remaining strong despite weakening internal economic indicators and a slumping oil industry.
Cashing In
Should the economy continue to grow, Canada and Mexico are better positioned than the United States to benefit. Canada’s vast holdings of oil allow it to earn more money when oil is in greater demand. That is, of course, when the economy is growing and energy needs are higher. Mexico, on the other hand, has a strong industrial base as well as a growing number of factories. Greater consumption demand from the US is only positive for Mexico, its citizenry and currency.
It’s surprising how the Euro and Dollar are heading in opposite directions now, after so many months of the direct opposite. It seems the North America/ South America NAFTA structure is much less susceptible to integrated failure as is the European Union. Would anyone like to run with this assertion?
First Quarter Outlook for Real, Argentine and Mexican Peso
Our last article reviewed the roller coaster that was 2009 and many of the core themes that influenced FX market pricing and movements throughout the year. Based on further observations our analysis to date indicates that thematic overtones such as liquidity, behavioral unpredictability of the ‘human element’ and over-reaction to basic fundamentals are likely to keep FX market participants firmly entrenched and involved in what could be another dynamic yet unpredictable year ahead.
First of all, US stimulus has been $trillions not $billions. Secondly, the US (and a number of other industrialized nations) have utilized some of the most most powerful policies to devalue their currencies in the history of modern civilization – printing money under the guise of ‘quantitative easing’ is just one example. Is it any wonder that the CAD, AUD and Peso an other currencies have been rallying together? But so has gold, silver and commodities…
BTW, has anyone seen the very interesting negative correlation between the USD-CAD and SPX see http://chart.ly/p5p6wy ?