Overview: The Canadian dollar and Mexican peso are extending its pre-weekend gains on news that a new NAFTA deal (US-Mexico-Canada Agreement USMCA) has been struck. Against most of the other major and emerging market currencies, the US dollar is firm. China’s mainland and Hong Kong markets are closed for a national holiday. Japanese shares edged higher, but most other markets in the region, including South Korea, Taiwan, and Australia slipped. European markets are firmer. The Dow Jones Stoxx 600 is 0.25% higher, led by information technology, materials, and energy in late morning turnover. Italian shares are leading the way, recouping a little more than a third of the sell-off at the end of last week. After dropping 7.25% before the weekend, Italian bank shares index is up about 1.3% today. Italian bonds are a bit calmer as well, with the 10-year up one-two basis points while yields are two-four basis points higher. The Italian two-year yield is up five bp, while most other EMU yields are slightly firmer. The US 10-year yield is up a couple of basis points to almost 3.09%.

US-Mexico-Canada Agreement: For all the handwringing, the new agreement does not appear to be a radical change, but a small incremental improvement. And like the agreement struck with South Korea, minor changes appeared enough to satisfy the US Administration. Talk loudly and accept small compromises appears to be the emerging Trump trade doctrine. Canada accepted improved access to its dairy market, dropping the variety of milk program introduced last year. It agreed on stronger intellectual property rights and tighter rules of origin for autos. Canada succeeded in getting the US to agree to keep the Chapter 19 dispute mechanism but accepted a phasing out of the investor-state dispute settlement with Canada, though it will remain for some sectors in Mexico. Canada also agreed to raise the threshold to apply duties and retail sales tax on cross-border purchases.  While Canada and Mexico will be exempt from US auto tariffs, the steel and aluminum tariffs will remain in place, with promises that they will be dealt with separately.  The US dollar fell 1% against the Canadian dollar before the weekend as optimism that a last-minute deal would be struck surfaced. The US dollar gapped lower in Asia against the Canadian dollar and approached CAD1.28. The gap is found roughly between CAD1.2885 and CAD1.2910. The US dollar is below its 200-day moving average (CAD1.2870) for the first time in six months. The next important technical area is found near CAD1.2700, but the intra-day technicals are stretched. Meanwhile, the US dollar is testing the MXN18.50 area. Last month’s low was set near MXN18.40. It is the fourth consecutive session that the US dollar losing ground to the peso. It has fallen for the weeks.