CAD & MXN : US Presidential Election

(Wed, 2 Dec 2020). Both USD/CAD and USD/MXN rates showed significant weakness in the immediate reaction to the US presidential election results. The US political and vaccine development news over the past week have been extremely bullish for the Canadian Dollar and the Mexican Peso, insofar as it means a higher likelihood of resolving trade tensions.

BIDEN WIN NORMALIZES US TRADE POLICY

Democrat Joe Biden has won the US presidency.While many of his policies and plans may not come to fruition thanks to a divided Congress, one area that he can directly impact, regardless of the composition of Congress, is trade.

Trade wars were a hallmark of the Trump era. While a president-elect Joe Biden may not deviate that far on trade policy when it comes to China beyond ending tariffs, there is a reasonable basis of expectation that the Biden administration will seek to normalize trade policy with key allies.

US’ TRADING PARTNERS HAVE BEEN PRESSURED

Among the countries at the top of this list include Canada and Mexico, the United States’ immediate geographic neighbors. The combination of higher tariffs implemented by the Trump administration and the coronavirus pandemic has hurt the Canadian and Mexican economies significantly. That the United States is in the midst of its worst stretch of the coronavirus pandemic is hobbling Canadian and Mexican economies from fully recovering.

The reliance of both of these economies on the United States can’t be dismissed; the United States is both countries’ largest trading partner. More than 80% of Mexico’s exports going to the United States and 70% of Canada’s exports going to the United States. Approximately 30% of Mexico’s GDP is derived from economic activities involving the United States, while that number is near 20% for Canada.

RECENT DEVELOPMENTS BULLISH CAD, BULLISH MXN

Alongside the news that COVID-19 vaccinesare reaching promising milestones in their development, optimism has been abound and growth-linked and riskier currencies have been outperforming. Hope that the United States will soon be able to wrangle control of the coronavirus pandemic through widespread vaccination has investors ignoring otherwise alarming COVID-19 outbreak data.

The developments over the past week have been fundamentally long-term bullish for the Canadian Dollar and the Mexican Peso. A Biden win means relaxed trade tensions in the form of reduced tariffs, a more concerted US federal effort to bring the coronavirus pandemic under control, and more US fiscal stimulus in the near-term that will help re-invigorate the US economy (even if the fiscal stimulus is smaller due to no blue wave).

These developments and ensuing price action suggest that the Canadian Dollar and Mexican Peso stand to be winners under a Biden administration, regardless of the composition of Congress.

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