Morning Commentary: Foreshadowing

Foreign Exchange - Morning Commentary
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last Friday, markets were rattled by reports that the US is considering capital market restrictions on US investments into China. But, that was last week.  For today, European and US equities are up in part due to the US Administration issuing a partial denial to the reports; the White House said that there are no current plans to limit financial market access but did not rule these steps out.  In the end, this last episode provided yet another example of the volatile nature of US trade policy.  Regarding the uncertainty of trade policy, it is also important to remember that US trade tensions extend beyond just China. 

Last week also brought news that the US is preparing to impose tariffs on the EU after the US won its WTO Airbus dispute.  While the origin of these tariffs is different from most of the other tariff actions Trump has undertaken, there are still some notable market signals from the US’s recent action.
Notably, the US’s Airbus dispute wasn’t resolved through negotiations to avoid tariffs.  The EU currently has its own illegal subsidy case against Boeing, for which a final WTO decision is due in 6 months.  Tariffs could have been avoided by negotiating a comprehensive global framework for subsidies that addresses both the US’s and the EU’s claims.  Instead, the US’s actions support the narrative for a confrontational approach not only because it chose the tariff route but also because it has threatened the use of carousel tariffs to maximize damage. 

As a result, the EU is not only expected to retaliate when its own ruling comes through, but the EU is also considering a tit-for-tat retaliation by reopening a 22-year old dispute with the US.  Should this be done, it is reasonable to think the US would respond, setting off a tit-for-tat cycle. 

The point being, the US’s planned imposition of Airbus tariffs will merit monitoring as an escalation here likely has negative read-through effects on other US-EU negotiations.  Keep in mind that the waiver on EU auto tariffs expires in mid-November.  Should the US move to tariff European autos, it would have a much more significant impact on the EU and world economy.
  • Expect Chinese yuan liquidity to be thin as China heads into its National Day/Golden Week holiday tomorrow.  While the yuan ultimately finished the overnight session weaker, it was initially helped by a stronger-than-expected fix as well as better than expected PMI data. 
  • In the UK, the final Q2 GDP number confirmed that the economy contracted by 0.2%.  In related news, the Lloyds Business Barometer showed that business confidence is at its lowest levels since after the 2016 referendum.  Confidence was lowest in Scotland, Northern Ireland and London.   
  • The NZD is weaker on the session after a disappointing business confidence and activity outlook survey results were announced. 
  • The Reserve Bank of Australia meets tonight for its next rate decision.  The markets are currently assigning a ~79% chance of a rate cut.  Ultimately it is more of a question of when, not if, the central bank will cut rates again this year. 
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