Lopez Obrador's win puts US and Mexico on a collision course on NAFTA

Mexican President-elect Andres Manuel Lopez Obrador is likely to add a new wrinkle to already endangered negotiations for the North American Free Trade Agreement (NAFTA) and to the trajectory of the country’s currency and financial markets.

The Mexican peso (MXN=X) rose as much as 1.4% as it looked like Lopez Obrador, or AMLO, would secure the presidency. But then it reversed course as it became more likely his MORENA political party would also take controlling stakes in Mexico’s Congress, dropping 1%.

Investors had gotten more comfortable with AMLO as the July 1 election day approached. But much of that comfort was based on an expectation that the new president would face congressional and institutional opposition to major reforms, such as large increases in federal spending or reforms of the energy sector.

Perhaps the biggest factor weighing on the peso is the future of NAFTA.

Mexico “may take a new approach” with AMLO at the helm, said Juan Perez, senior FX trader and strategist at Tempus Inc. That means that NAFTA “is under serious peril,” he said.

The biggest threat is not that the new Mexican president would want to leave the trade pact, but that he will be less willing to bend to U.S. President Donald Trump’s will, said Shannon K. O’Neil, a senior fellow for Latin America Studies at the Council on Foreign Relations.

Andres Manuel Lopez Obrador’s win in Mexico could be a gift or a curse for relations with America

Lopez Obrador said on Monday that he would be respectful of the current government’s NAFTA negotiators and that his transition team will seek to join the trade talks. That makes sense given the outsized impact of trade on Mexico’s economy and the U.S. being the country’s major trading partner.

“What changes is AMLO’s vision for Mexico and the Mexican economy is focused domestically, it’s not focused internationally,” O’Neil told Yahoo Finance. “So while he will not blow up NAFTA, I don’t think he cares about NAFTA as much as [outgoing Mexican President Enrique Pena Nieto] and the presidents before him.”

As a candidate, AMLO’s mandate could be described as “Mexico First.”

“He believes much more in industrial policies led by the state, roles for thenstate in agriculture, in energy and in many other sectors. That’s what promotes economic development, not free trade,” O’Neil said. “I don’t believe his administration will end NAFTA but I also don’t see them caring as much about NAFTA and seeing it as this anchor for all of economic policy.”

That’s unlikely to mesh well with Trump’s diplomatic doctrine, which has been described by members of his administration as “We’re America, Bitch.

The value of the dollar against the Mexican peso so far in 2018. The dollar has strengthened and the peso has weakened in recent months.

However, there is some hope. Though it may be fleeting.

NAFTA proponents estimate that 14 million jobs rely on the accord and that the jobs it has created pay better than those that have been lost. NAFTA also disproportionately benefits certain businesses, most notably the automobile and agriculture industries, which boast strong lobbies. The U.S. Chamber of Commerce recently came out in opposition to Trump’s trade tariffs and would likely work similarly against leaving NAFTA.

Pulling out of NAFTA could also boost inflation, causing the Federal Reserve to quicken its pace of monetary policy tightening — a possibility that has already sent U.S. stocks tumbling on multiple occasions this year.

A failure to find a deal on NAFTA would likely pressure the dollar and U.S. stocks and hammer the value of the Mexican peso, which is now hovering around 20 per dollar, near where it was when the country’s central bank began aggressively raising interest rates after Trump’s election in 2016.

Robert Zoellick, a former president of the World Bank and a U.S. Trade Representative who now serves as chairman of asset manager Alliance Bernstein, told Yahoo Finance in March that he expected the combination of AMLO in Los Pinos and Trump in the White House was likely to end to the free trade pact.

“NAFTA may not survive this year,” Zoellick said. That was before the American president instituted tariffs on steel and aluminum for both Canada and Mexico and the retaliatory tariffs announced by both countries.

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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