Trump’s trade war: Bye, bye NAFTA as we knew it
FX Trade Strategist / http://www.Loonieviews.net
· ECB meeting headlines a huge amount of central bank meetings next week
· Data cupboard is jammed full of top-tier data including US nonfarm payrolls
· Trump’s trade tariffs roil markets
The ECB’s Mario Draghi will kick off a bumper week for central bankers. Pic: Shutterstock
By Michael O’Neill
President Trump promised to tear up the North America Free Trade Agreement (NAFTA) calling it the “worst deal ever.” He hasn’t ripped up the deal yet, but his actions of late suggest he has shortened the acronym. It may be fair to call it the North American Tariff Agreement (NATA).
On Thursday, the president said that he would impose a 25% tariff on steel imports and a 10% tariff on aluminium imports It may be a direct shot at Canada. Canadians want to believe that the penalties are aimed at China, but that country only accounts for 2% of US steel imports. CNN reports that Canada is America’s largest source of steel and steel products, accounting for 16% of imports. Why target one of your smallest suppliers?
Last April, Trump slapped a 20% tariff on Canadian soft-wood lumber saying the product was unfairly subsidised. That tax was levied despite the US never winning a challenge in front of NAFTA or World Trade Organisation panels. It is still in place.
That same month, the Americans imposed a 292% duty on Bombardier C-Series aircraft, claiming unfair subsidies. On January 26, 2018, the US International Trade Commission, ruled that those aircraft “did not injure US industry.”
These hostile trade practices are occurring even as Canada, the US and Mexico enter Round 7 of the NAFTA renegotiations. Is America bargaining in bad faith? Maybe so. On March 2, President Trump tweeted “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win. Example, when we are down $100 billion with a certain country, and they get cute, don’t trade anymore – we win big. It’s easy!”
The Bank of Canada may cushion the blow. Wednesday, the BoC’s monetary policy decision is due. They are widely expected to leave rates unchanged. The January statement cited NAFTA concerns as a reason for caution and USDCAD rallied. Trump’s recent actions validate the BoC’s cautious stance. One way to cushion the economy against American tariffs is to devalue the currency. The BoC won’t do that or even say anything about the loonie. However, they could tweak the reference to “uncertainty surrounding the future of NAFTA” by replacing “uncertainty” with something like “scepticism” or even “doubtfulness.” The ensuing plunge in the Canadian dollar would more than recoup the losses from the tariffs. It is an unlikely scenario, but it cannot be ruled out.
USDCAD is bid. Canada Q4 GDP data didn’t help. The 1.7% rise in Q4, q/q was below the forecast for a gain of 2.0%, adding to the bullish sentiment. USDCAD has been in a steep uptrend since February 12, and it stays intact while prices are above 1.2770. Topside moves are supported by the break above the 200 day moving average. If strong resistance in the 1.2915-50 area is overcome, there isn’t much standing in the way until 1.3010 and then 1.31650
Chart: USDCAD daily
Source: Saxo Bank
The week ahead
The European Central Bank meeting on Thursday headlines a central bank show that includes the Reserve Bank of Australia on Tuesday, the Bank of Canada on Wednesday and the Bank of Japan on Friday
In between, US nonfarm payrolls lead a list of actionable economic data from around the globe. Possible fresh equity market turmoil and added fall-out from President Trump’s latest tariffs will make traders dance.
Tuesday: The Reserve Bank of Australia is expected to leave rates unchanged at 1.50% with a statement similar to the previous one.
Wednesday: Bank of Canada will leave rates unchanged. The statement will likely be cautious as the Trump steel tariff’s keep NAFTA uncertainty on the front burner.
Thursday: European Central Bank rates will be left unchanged. The statement is expected to be “tweaked” with a Reuters survey reporting that 1/3 of 56 economists surveyed believe the “easing bias” will be dropped
Friday: Bank of Japan will leave rates unchanged.
The actionable data starts on Monday with non-manufacturing PMI data released China, Europe, and the US.
On the economic data front, Australia GDP (released Wednesday) is expected to rise 0.5% supported by domestic demand. Eurozone Q4 GDP is due, forecast unchanged at 2.7%, y/y.
The week closes with the US nonfarm payrolls report. (Forecast 190,000) Average hourly earnings are expected unchanged at 0.3%, m/m. Canada employment data is due at the same time
The week that was
Monday: The US dollar lost ground in Asia and Europe, in part because of position adjusting ahead of Fed Chair Powell’s Congressional testimony. GBPUSD was lifted after Bank of England Deputy Governor Ramsden chirped hawkishly about interest rates. New York trading was on the choppy side, but by the end of the day, the US dollar had recovered all of the losses from Friday’s close. Mario Draghi was his dovish self in a speech to the European parliament. It didn’t have any impact on EURUSD, and neither did a soft German IFO survey. Wall Street rallied in the morning but gave back most of the move by the end of the day.
Tuesday: NZDUSD got spanked after posting a wider-than-forecast trade deficit. Eurozone data was mixed to positive, but EURUSD opened in New York near the bottom of the range. The rest of the majors were rangebound ahead of Jerome Powell’s speech and US economic data. Durable goods orders were weaker than forecast but didn’t really cause a ripple. Mr Powell did. Traders took his optimistic outlook to mean four rate hikes in 2018 (up from three) and the US dollar soared. The day finished with Wall Street and commodity prices a lot lower.
Wednesday: Asia FX did not appear to be all that impressed with the FX reaction to Powell’s comments. USDJPY was sold after the Bank of Japan reduced purchases of super-long bonds. AUDUSD and NZDUSD traded sideways. GBPUSD was under pressure from soft Gfk consumer confidence data. Brexit headlines undermined sterling as well. EURUSD was rangebound until New York opened and that session as busy, The US released a mixed bag of data led by Q4 GDP that was as expected. However, month-end demand for dollars fortified the greenback. Wall Street closed at a loss. Oil prices lost 2.4% on a combination of the strong dollar and rising US inventories.
Thursday: AUDUSD and NZDUSD drifted lower in Asia and Europe. USDJPY found a bottom early and drifted higher on firmer Treasury yields and ahead of more Jerome Powell testimony. The antipodeans didn’t get much help from better than expected China Caixin Manufacturing PMI data. EURUSD traded with a bearish bias, and GBPUSD stayed in a narrow range until New York opened. The US dollar was bid during the morning, bolstered by strong Initial Jobless Claims and ISM Manufacturing data. That lasted until just before lunch when President Trump announced tariffs on steel and aluminium imports. All hell broke loose. By the end of the day, EURUSD rose from a low of 1.2157 to 1.2272 and GBPUSD followed suit. USDJPY which had peaked earlier at 107.17 dropped to 106.16 Street crashed with the DJIA falling 1.68%.
Friday: Global equity indices were in the red as Trump’s trade tariff’s sparked a shift into risk aversion trades. USDJPY broke support and was probing support in the 105.40 area. EURUSD and GBPUSD held on to earlier gains and the commodity currency bloc was mixed.
– Edited by Clare MacCarthy
Michael O’Neill is an FX consultant at IFXA Ltd