Morning Commentary: Down to One

Foreign Exchange - Morning Commentary
Down to One
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Equity markets around the world have staged an impressive rally this year with massive gains across the board.  Granted some of these gains are due to base effects as the equity markets sold off sharply in Q4 last year.  Nevertheless, the reduction in global headwinds has also provided a significant boost. 

As we stand on the cusp of a new year, what does next year have in store?  For me, one of the key concerns is the defanged WTO.  As a reminder, the WTO and the General Agreement on Tariffs and Trade (GATT) have been around since 1948.  While the WTO does a lot of things, its dispute resolution function plays a critical role in ensuring the proper function of trade. 

In total, 7 independent judges are appointed to 4 year terms and make rulings on trade disputes.  While there are 7 judges in total, only 3 are required for each case to proceed.  Over the past two years, the US Trade Representative has blocked any re-appointments and refuses to do so until the WTO is reformed.  As a result, the number of judges dropped from 3 to 1 last week.  In the absence of a panel of judges, the rules revert back to pre-1994 GATT rules where the rulings are not binding. 

With the WTO Appellate Body powerless to make decisions, what then happens to pending disputes such as the Boeing-Airbus conflict? In October, the WTO ruled that Airbus is subsidized and approved US retaliatory tariffs.  However, Europe has its own case claiming that Boeing is also subsidized and now has to decide whether it will move forward without the blessing of the WTO.

On a broader level, many countries are moving to create a “WTO minus one” system to resolve disputes in the interim.  Clearly the “minus one” refers to the US and reinforces the America First strategy that is becoming more and more entrenched.            
  • Mexico’s GDP proxy declined by ~0.5%.  While this technically beat expectations, there were little positives in the report.  A combination of temporary factors, including a drop in oil production, was behind the drop. 
  • Japanese supermarket sales declined by -1.4% but was an improvement on the prior print.    
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