Morning Commentary: Silent Escalation

Foreign Exchange - Morning Commentary
Silent Escalation
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
At the beginning of February, the Commerce Department announced that it would begin imposing countervailing duties (CVD) if an undervalued currency was determined to have damaged a US firm.  The process for determining if a weaker currency constitutes a subsidy comes in three parts. 

The first step is to establish that policy action weakened the currency below equilibrium, the second is to assess the economic damage, and the third is to calculate the appropriate countervailing duties.  Notably, the Commerce Department reiterated that some sort of government action, excluding that from an independent central bank, was needed to find a currency to be undervalued. 

In the near term, we don’t anticipate an escalation in trade tensions ahead of the elections.  If anything, President Trump is likely to tout his trade accomplishments via USMCA and the Phase 1 trade deal.

However, the Commerce Department’s announcement serves as a reminder that the US’s confrontational strategy on international trade has not gone away with the deals referenced above.  Keep in mind that Trump sees tariffs as an effective negotiating tool.  While he has shown sensitivity towards actions that could push up consumer prices and impact his base, this could all change with Trump’s re-election; that is where the broad implications of CVD become a concern. 

CVDs are intended to be firm- or product-specific.  However, once the determination of harm due to an undervalued currency is made against one product, it is likely that all industries that deal in that currency request action be taken.  This would quickly take us from a micro policy to one with sweeping macro implications.  Should this happen, the likely USD reaction would be one of strength, the exact opposite of what the US Administration desires. 
  • Data on the rate of infection from the SARS-CoV-2 virus suggests the virus could be slowing.  Tuesday brought 1,749 new confirmed cases, the lowest amount since January 29 and down from 1,886 cases a day earlier.  While this is good news, experts still warn of the possibility of a spike in infections as the economy restarts after an extension of the national Lunar New Year holiday and shutdowns of workplaces and public gathering spaces.
  • China, Singapore and South Korea have all signaled additional stimulus measures to combat the negative economic impact of the SARS-CoV-2 virus.  China is considering cash injections to aid its crippled airline industry, Singapore’s budget has dedicated a large portion to support areas of the economy hit by the virus, and South Korea is working on a similar stimulus package.    
  • Canadian CPI beat expectations, rising 0.3% MoM against expectations for a 0.2% increase.  However, the core measures, which are more important to the BoC, remained relatively stable.  As such, today’s print should do little to change the Bank of Canada’s recent shift towards an easing bias.   
  • Australian wage data showed a 0.5% QoQ increase, meeting expectations.  Given this, wages continue to be depressed and show high spare capacity in the labor market.  Australia’s employment report will be released tonight. 
  • UK CPI surprised to the upside, rising 1.8% YoY against expectations for a 1.6% rise.  However, this uptick was due largely to temporary factors.
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