What The New Pacific Trade Agreement Could Mean For Major Currency Futures

In the midst of the shake-up in equity markets, the apotheosis of the U.S. midterms elections, and further mixed signals on U.S.-China trade negotiations, a major development in global economics flew under the radar for most investors. While it might not rock the global economy to its core, the long-simmering Trans Pacific Partnership is finally set to take effect at the end of the year. The agreement is expected to deliver upwards of 1 percent GDP growth to its member nations, and there are some currency markets that stand to benefit in a big way from its persistence.

Despite the gargantuan hole left by the United States’ departure, the amended TPP, which includes key currency players Japan, Canada, Mexico, and Australia, remains one of the largest free trade deals to make the world scene, representing 14 percent of global GDP. And, with the U.S. and China at odds with one another, the new TPP deal could open up markets for countries on either side of the prime meridian looking to dodge the two powerhouses on either side of the trade war.

For North American partners Canada and Mexico, the implementation of the deal could lend some much-needed gas to Canadian dollar and peso futures. Both nations’ notes have floundered intermittently with year-to-date lows thanks a surging U.S. dollar and persistent lumber and steel tariffs not settled with the revamped NAFTA deal.

Increased access to the Pacific will likely see more demand in Canada’s agricultural and paper-products, which represents roughly 40 percent of the countries current exports to the region. The benefit to Mexico might be a little more modest, with Pacific trade only accounting for about 2 percent of the nation’s total exports. However, beef from Mexico might find eager markets in Japan, which has a massive 38.5 percent tax on meat imports from U.S. beef imports.

Overall, this elimination of trade barriers is what the revised TPP was designed for, particularly by TPP-champions Japan and Australian, both of whom have currencies on the decline due to projections of slowing economic growth. The hope is that the TPP will stay some of the pressure of a tightening global economy.

For its part, the Japanese yen has weathered the contentious global trade environment better than most, although it is still under pressure from a strong U.S. dollar and diminished export growth. Hence the reason Japan is eager to earn access for its automotive exports in emerging economies in the Pacific like Vietnam and Singapore. Cars and components accounted for roughly 20 percent of the nation’s total exports in 2016. Finding greater purchase for Japanese cars in growth economies like Malaysia, which grew demand by as much as 50 percent this year, would be a massive boon to the nation’s overall output.

Winning industries in Australia include its mineral and agricultural industries, the latter of which stands to grow by $100 billion by 2030.  However, the greatest boon is simply Australia’s expansion beyond China, which accounted for a third of Australia’s total exports in 2016, and into smaller, but faster growing markets in southeast Asia.

All this to say that, even without the U.S., the Trans-Pacific Partnership stands to inject the Pacific theater with a whole new scale of capital in the coming months and years. While the U.S. dollar might have the upper hand in global trade at the moment, traders in currency future would do well to keep an eye on the East.