Goldman Sachs expects announcement in the next few months
US demands in NAFTA negotiations are impossible for Canada and Mexico to accept. The positions will ultimately lead to an impasse and the US will announce its intention to pullout of the agreement.
"For now, U.S. Trade Representative [Robert] Lighthizer looks willing to let the talks fail unless he can secure major concessions," they wrote. "While we expect the rising odds of tax reform to put less pressure on the trade agenda, we do not expect passage of tax reform will raise the odds of a successful Nafta renegotiation, so a withdrawal announcement looks more likely than not even if tax reform is enacted soon."
The major fallout will come in USD/MXN, Goldman says. It will rise to 20-21 from 19 currently.
"When we also consider the commensurate rise in political risk this would entail, which already seems to be weighing on the currency to some degree, then 22-24 still seems reasonable," they said. Mexico's election is also coming up next year.
However, USD/CAD could also rise 6%, they forecast, and could hit 1.35 again next year.
