When it comes to trade talks, the ongoing US-China trade negotiations have garnered the lion share of the headlines. However this is set to change with the Section 232 report on automotive trade.
After the report is published, the President will have 90 days to respond with a decision on the recommendations in the report. In the case where tariffs are recommended and selected, the tariffs will go into force within 15 days.
Using history as a guide, we would like to remind our readers that the administration did not use all 90 days with steel and aluminum tariffs so it wouldn't be a surprise if auto tariffs are also implemented before the 90 day deadline. But when anticipating future actions, it is also important to understand the context of automotive versus steel and aluminum tariffs. In the case of steel and aluminum, the objective appears to have been to protect the domestic industry from Chinese overcapacity by using tariffs as a protective barrier.
Automotive tariffs are more likely to be used as negotiating leverage as opposed to a way to support the American industry. Of the major auto producing nations, only Canada, Mexico, and Korea have signed formal agreements addressing auto trade issues. This leaves the EU and Japan, two nations that are just entering formal bilateral trade negotiations with the US.
While handshake agreements have been reached to exclude the EU and Japan from auto tariffs as long as negotiations are ongoing, threatening scheduled tariffs is an often used strategy from this White House should negotiations fail to progress under the cover of the 232 report. Point being, it is quite possible that the markets could soon have another source of uncertainty to contend with.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 6.00%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Durable Goods Orders
Expectations for a gain of 1.8% after a gain of 0.7%
Existing Home Sales
Expectations for a slight increase from December
Canada Retail Sales
Expectations for a decline of 0.3% after a -0.9% print
EZ Composite PMI
Expectations for a small gain from 51.0 to 51.1
German ZEW Survey
Expectations for a sharp decline from 27.6 to 22.5
German final Q4 GDP
Expectations for a flat print of 0.0%; YoY at 0.9%
German IFO Index
Expectations for a decline from 99.1 to 99.0
U.K. Jobs Report
Expectations for the UR to remain at 4.0%
Asia/Japan, and New Zealand
Japan Trade Balance
Expectations for a larger trade deficit
Japan Mfg. PMI
Expectations for near unchanged at 50.3
Japan Nat’l. CPI YoY
Expectations for a decline from 0.3% to 0.2%
Aussie Jobs Report
Expectations for a gain of 15k; UR unchanged at 5.0%
The EUR has fallen in eight of the past ten sessions and made a new low for 2019 on Friday before correcting higher. EZ economic data has been consistently weak and disappointing yet the EUR remains largely within the same ranges we have been witnessing since the beginning of November. Despite the recent EUR weakness and dysfunctional politics, expect consolidation ahead this week.
Since August of last year, the GBP has continued to experience short bursts of bullish and bearish price action contingent upon U.K. economic data, the larger DXY trends, and the ebbs and flows of the Brexit negotiations. January saw one-dimensional short covering and buying of the GBP where it peaked near the end of the month and February has brought only selling of the GBP. Like the euro, expect consolidation ahead this week with high sensitivity to any Brexit developments.
While the correlation with the JPY and "risk-on" or "risk-off" strategies is not as strong as in 2018, the correlation remains worth monitoring. The JPY rose sharply during December as equities and interest rates cratered; as stocks have rebounded in 2019 along with interest rates, the JPY has weakened. Momentum is a fleeting thing; optimism surrounding a successful U.S. – China trade negotiation is causing a risk-on environment reducing the need to be in the safe haven currencies. For the short term, expect a steady to weaker JPY.
RBC, our mothership, had forecast a range for the CAD for Q1 of 1.3600/$ to 1.3100$...we congratulate them on picking a top when it appeared that further CAD weakness was on the horizon. Since the correction lower in the USD/CAD, the CAD has been largely trapped between 1.3100 and 1.3375 for the past month. Expect more consolidation and sideways trading this week.
The CNY has been benefiting from a number of fronts since the beginning of the year. The Chinese government and central bank have been using all monetary and fiscal means possible to keep the weakening economy liquid and afloat. Continued positive expectations surrounding a successful conclusion to the U.S. – China trade deal have also spurred demand for CNY. But, over past month, the CNY has consolidated its gains as the markets have priced in more and more positive news. Expect more sideways trading this week.
The AUD reflects the recent bipolar nature of global equities and interest rates. December was a "risk-off" month and the Aussie weakened sharply reflecting all that pessimism. January and February have gotten off to a great start with more optimism for equities and interest rates, and the AUD has rebounded off of its lows. The Aussie remains on autopilot and remains highly synchronized with global equities and commodities; continue to expect those correlations to hold in the short term. For this week, sideways trading seems to be order.
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