Morning Commentary: Deescalating Escalation or Escalating De-escalation?

Foreign Exchange - Morning Commentary
Deescalating Escalation or Escalating De-escalation?
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After the U.S. escalated tariffs on China last week, the markets began to reassess the read through implications, of the U.S.’s renewed hardline trade policy, on trade talks with other countries.  Specifically, the markets became concerned that the administration’s defense on the use of tariffs would bolster the case for imposing automotive tariffs on the EU and opposing the removal of steel and aluminum tariffs as a prerequisite for the ratification of USMCA.
 
However, yesterday brought signs of de-escalation as U.S. officials indicated progress on the possibility of removing steel and aluminum tariffs against Canada and Mexico.  Additionally, it was reported that the U.S. will delay its decision on auto tariffs on the EU. 
 
Yet, overnight, it was reported that the U.S. wouldn’t delay its decision on auto tariffs as much as it would give the EU and Japan 6 months to agree to a deal that would “limit or restrict” auto imports, tempering a bit of the enthusiasm from yesterday.  Additionally, the U.S. took further steps to escalate tensions with China by signing an executive order effectively prohibiting Huawei from selling telecom equipment in the U.S., a move that was fairly well telegraphed.   
 
However, more significantly, the U.S. has also threatened to blacklist Huawei from buying essential components from the U.S., a move that would be a material blow to the company’s viability.  If this threat were to be realized, it would represent a much more market negative event than the prohibition of Huawei sales in the U.S. 
 
Ultimately, the overall trade discussion remains very fluid.  Nevertheless it does seem like the U.S. is attempting to circle the wagons by de-escalating/pushing for a conclusion to talks with friendly trading partners.  This would then set the U.S. up to focus on China and provide the foundation for a protracted battle. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The GBP is lower for the eighth time in nine sessions.  PM May continues to struggle to make progress on her Withdrawal Agreement, both with the opposition party as well as with her own party.  This lack of progress, combined with heavy losses for her party in local elections, has raised the prospects of a leadership change that could put a hard Brexit back on the table.  Notably, Boris Johnson, who is pro-Brexit, has announced he would run to succeed May.
  • News reports indicate that President Trump has reached out to Iran’s leadership in an effort to deescalate tensions with the country. 
  • Japanese PPI data came in stronger than expected at 1.2% YoY versus expectations for 1.1%.  However, this was a slowdown from the previous print of 1.3%.
  • Australia reported mixed employment data.  The headline numbers beat expectations coming in at +28.4K versus expectations for a 15K gain.  However, the components were weak as the majority of the jobs added were part-time jobs.  Additionally, the unemployment rate rose to 5.2%.     
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