Morning Commentary: The Power of Symbolism

Foreign Exchange - Morning Commentary
The Power of Symbolism
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The US had imposed, removed and re-imposed a 10% tariff on non-alloyed unwrought aluminum from Canada earlier this month.  In justifying its actions, the Trump Administration claimed that US businesses were “being decimated” by Canada aluminum and that dependence on Canadian aluminum was a threat to national security.  For Canada’s part, the country announced retaliatory tariffs on US aluminum. 

On its own, the tariff amounts in question are small, but the symbolism is not.  By re-imposing tariffs, the US has shown the markets that trade wars are not over and having a trade deal with the US does not remove the threat of additional tariffs. 

There are two drivers behind the latest escalation.  The first relates to the election and the administration’s strategy of getting tough on foreigners.  This could not only mean targeted tariffs but also additional immigration restrictions and a focus on China as the source of the COVID-19 crisis.  The second factor is the Trump administration’s desire to reduce the trade deficit, to bring back US manufacturing jobs and to address national security concerns.  Without the second factor, trade tensions could potentially de-escalate after the election. 

The second factor is also important because the US trade deficit is getting worse.  Many countries, including Mexico, Japan, South Korea, ASEAN and the European Union, have a larger trade surplus with the US than when the trade war started.  Further, manufacturing jobs have given back all the gains from 2010 to 2019. 

What this nets out to is the expectation for trade escalation to and through the election regardless of who wins.  However, the approach between the two candidates will likely be different.  Trump would likely continue with a multi-front escalation while Biden would likely continue to pressure China but try to reconcile with most allies. 
  • House Speaker Pelosi has recalled Democratic lawmakers back to Washington DC to address the postal service crisis.  A vote on a bill to stop the USPS from implementing changes to its operations could come on Saturday.
  • While work is being done on the USPS, Congress remains on recess.  This means the Phase 4 stimulus package, if there is one, is still unlikely until September at the earliest.  The key issues remain state and local aid, enhanced unemployment benefits and liability shields. 
  • US-China tensions continue to linger.  The two countries were expected to hold virtual talks on Phase 1 deal progress but no update has been received.  Beyond trade talks, the US added 38 Huawei affiliates to the entity list and will restrict access to US tech.   
  • Negative virus headlines continue around the world.  New Zealand has delayed its elections by a month due to the virus while Australia recorded its highest daily death number.  Hong Kong also extended its social distancing requirements.  In Europe, France is seeing rising infections and Italy and Spain have taken additional social distancing measures.
  • Japan reported weaker-than-expected Q2 GDP data with the economy contracting -7.8% QoQ versus estimates for a -7.5% contraction.  Unfortunately, the expected rebound in Q3 data has not materialized as expected due to a resurgence in the virus.  This, combined with PM Abe’s falling approval rating, likely leads to additional fiscal stimulus before yearend. 
  • Singapore announced additional fiscal stimulus measures aimed at supporting the labor market and aviation and hospitality sectors.
  • The Thai baht is Asia’s worst performing currency and political tensions are rising.  Over 10,000 people gathered for protests against the military-led government and the monarchy.  The protestors demanded the dissolution of parliament, an end to threats against civil liberties and a new constitution.  The protests against the monarchy are of particular notice given the harsh penalties under the country’s strict lese-majeste laws.  Economically, Thailand’s Q2 GDP contracted -12.2% YoY as tourist arrivals dropped to near zero. 
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