Morning Commentary: Whipsaw City

Foreign Exchange - Morning Commentary

Whipsaw City

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday, news reports suggested that the White House was making a push to gain ratification for USMCA as it officially kicked off the 30-day window for approval under the TPA framework.  This action, combined with other recent actions, was seen as a sign of improvements in the US-Canada-Mexico trading relationship. 
All of that changed on a dime when the markets were whipsawed by President Trump’s announcement that he would impose a 5% tariff on Mexican imports until illegal immigration is “stopped.”  The first round of tariffs is set to kick in on June 10 and could increase up to 25% by October in 5% monthly increments should illegal immigration remain unresolved. 
Currently, trade between the US and Mexico is covered under the NAFTA 1.0 agreement, which doesn’t allow for tariffs.  However, Trump is attempting to claim it as an issue of national security which would allow tariffs through the International Emergency Economic Powers Act (IEEPA), which is normally used to impose Treasury sanctions.  Should Trump choose to go this route, the legality of his move in this context can, and most likely will, be challenged.  Chuck Grassley, the Republican Senate Finance Committee Chairman, has already said that Trump’s announcement “is a misuse of tariff authority and counter to congressional intent” as trade policy and border security are separate issues.     
While all goods could be subject to tariffs, the auto industry is the one most likely hit the hardest.  Beyond the immediate impact on USMCA and Mexico, including Mexico’s response should this threat be realized, is the impact on global trade in general.  Beyond USMCA, the US is still in trade negotiations with China, Japan, and the EU.  In essence, what is the point of striking a trade deal with the US if it can arbitrarily impose punitive tariffs? 
Prior to this announcement, the markets were already starting to price in a prolonged standoff.  Should the US actually go through with this most recent form of escalation, the possibility of a “deal” with any country falls significantly.     
  • Bond yields are falling around the world.  Germany’s 10-year bond dropped to as low as -0.209%, the lowest ever.  US 10-year yields dropped to as low as 2.1454% and Greek 10-year bonds dropped below 3% for the first time ever. 
  • China appears to be taking further steps to weaponize its rare earths supply chain.  According to reports, the Chinese have developed more specific plans with restrictions initially focused on heavy rare earths on which the US is particularly reliant. 
  • Chinese manufacturing PMI data came in weaker than expected at 49.4 versus expectations for 49.9.  A sub 50 reading implies economic contraction and further fuels concerns of a global economic slowdown. 
  • US personal income came in better than expected, increasing by 0.5% MoM versus expectations for a 0.3% gain. 
  • German YoY CPI slowed to 1.4% from 2.0%, missing expectations for a 1.6% print. 
  • Japan’s jobless rate came in at 2.4%, meeting expectations. 
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