- USD continues advance in risk-off final session of week.
- EU, Canada response to White House tariffs in focus.
- US Dollar and Japanese Yen the winners in a "trade war".
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The US Dollar continued to advance against its developed world rivals Friday as markets braced for retaliatory measures from countries affected by President Donald Trump's decision to impose tariffs on steel and aluminium imported into the US, which now has analysts fearing a so called trade war and potential economic slowdown this summer.
"2018 is fast becoming the year of squandered opportunities for world growth. A fully-fledged trade war, major political risks and what looks to be a Fed wanting to take rates to neutral and beyond will prove substantial headwinds to growth. Over the near term the focus will be retaliatory tariff measures from the EU," says Chris Turner, global head of FX strategy at ING Group, in a note Friday.
President Trump said Thursday the US will impose tariffs of 10% and 25% on aluminium and steel imports from the EU, Canada and Mexico starting this Friday, citing "national security" reasons and failure to address White House concerns by the opposing parties as grounds for the move. Domestic metal production can be crucial for the manufacture of weapons and munitions during times of large-scale conflict.
Mexico has already retaliated with tariffs of its own on a range of US agricultural products while both Canada and the European Union have pledged responses while the European Union pledged its own response.
The EU is thought to be eyeing tariffs on Harley Davidson motorcycles and bourbon beverages produced in the US, Europe-bound exports of which were valued at around $2.8 billion in 2017.
Meanwhile, Canadian Prime Minister Justin Trudeau said at a press conference Thursday; “the American administration has made a decision today that we deplore, and obviously is going to lead to retaliatory measures, as it must.”
Fears are that these responses will merely beget an even heavier handed retaliation from the White House, much like China's initial retaliation did back in March, and that they could ultimately lead to a self-defeating tariff fight.
"Ahead of November mid-term elections there looks every likelihood that Trump will raise the stakes with proposed tariffs on the European auto sector, whose exports to the US are five times as large as steel and aluminium sector. Trump will feel he has a stronger hand given the relatively closed nature of the US economy (the US vastly out-performed Eurozone in 1Q18) and the tail-wind of fiscal stimulus," Turner adds.
A tariff fight might see the EU, Canada and other nations at a disadvantage because US companies and consumers import substantially more goods from Europe than vice versa. Technically, this means the value of imports the US is able to levy tariffs on is far greater than that the EU can levy its own retaliatory tariffs on.
"Fed former dove, Brainard, said the Fed’s forward-guidance language ‘is growing stale’ – perhaps laying the groundwork for a hawkish shift in the FOMC statement June 13th. Add in unsettled politics in Europe and what should be a big win for the left in the Mexican Presidential election July 1st, we expect investors to stay on the defensive this summer," says Turner.
Turner and the ING team say the winner from all of this in currency markets is likely to be the Japanese Yen, which is a safe-haven asset and so tends to rise during times of risk and uncertainty.
The US Dollar index was quoted 0.04% higher at 94.01 during the morningn session Friday and the USD/JPY rate was 0.30% higher at 109.12. The Pound-to-Dollar rate was unchanged at 1.3287 and the Euro-to-Dollar rate was 0.02% lower at 1.1690.
"Let me remind you of that as many observers interpret this incorrectly: by themselves unilateral US tariffs would be USD positive. It makes steel imported by the US cheaper (pre tariffs), thus changing the price relation of US exports to US imports (the terms of trade) in favour of the US economy, which should support real appreciation of the US currency," says Ulrich Leuchtmann, head of FX strategy at Commerzbank, in a note Friday.
Leuchtmann and the Commerzbank team say the currency market reaction to Thursday's trade announcements has been mild so far, largely because traders had anticipated the latest turn of events some time ago. However, things could easily change for the worse over the coming months.
"The effect on EUR-USD can be compensated for by EU countermeasures (such as the threatened tariffs on Bourbon, jeans etc.)," Leuchtmann adds. "Of course that does not mean that Europe will agree on countermeasures. If it does not do so then the US administration is likely to feel encouraged to introduce further import tariffs. Steel and aluminium might be irrelevant for EUR-USD, but more tariffs could soon change that."
Any European Union response to the White House would be doomed to calamity and failure without the suppport of member state governments, but it is those governments that will have to carry the cost of any tit-for-tat tariff fight with the White House - in terms of jobs, economic growth and electoral support. Leuchtmann flags that Germany's finance minister, Olaf Scholz, sounded "very soft" on the subject of retaliation Thursday.
Thursday's steel tariffs and responses come hard on the heels of a separate decision by President Trump to initiate a section 232 investigation, under the Trade Expansion Act 1962, into the current automotive landscape with a view to assessing whether it is necessary for America to impose higher tariffs on imported cars.
This was the same tactic deployed by the administration ahead of the steel and aluminium tariffs that are now expected to come into effect this week. Those tariffs only came about after a 232 investigation by Commerce Secretary Ross, which took more than six months to complete, found the current metals landscape is a threat to the US metals industry and so also, to national security.
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