President Trump has a ‘tariff-ic’ week
· Nonfarm payrolls surprises with robust 313,000 new jobs
· US dollar gains from data starting to fade
· Tariff exemptions give loonie and Mexican peso a reprieve
"National security" is America’s reason for the metals tariffs, the Iraq war and the embargo against impoverished Cuba. Pic: Shutterstock
By Michael O’Neill
The American government uses the term “national security” to justify any number of events or actions that suits its agenda. The US invaded Iraq on the pretext that Saddam Hussein had “weapons of mass destruction” that threatened US national security. Russia is considered a national security threat. So is Cuba, a country so impoverished it is trapped in the 1950s. Venezuela is a national security threat because the US does not like that government.
On Thursday, President Trump announced that the importation of steel and aluminium was “in such quantities and under such circumstances as to threaten to impair the national security of the United States.” Miraculously, the threat vanishes when 25% and 10% tariffs are applied.
The Canadian dollar (and Mexican peso) were victims of the trade action. Canada is America’s number one steel supplier with 16.7% of the market and is also America’s number one source for aluminium.
USDCAD was probing key resistance in the 1.3000 area when President Trump gave Canada and Mexico an “eleventh-hour” reprieve. Both countries were exempted but with a caveat. The exemption is only good as long as the Nafta negotiations are happening. If the deal is scrapped, then the tariffs would apply.
It is a reprieve, not a pardon. Nafta is far from being successfully renegotiated. When round 7 ended on March 5, US trade representative Robert Lighthizer said: “Our time is running very short. The longer we proceed, the more political headwinds we will feel.” Then he talked about the possibility of bilateral agreements.
The Bank of Canada must have taken note of his remarks because they underscored trade concerns in their policy statement on March 7, which read “trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.”
US interest rate increases are very likely to outpace those in Canada, partially due to Canadian economic underperformance compared to that of the US. Nafta negotiations are the wild card which should limit USDCAD losses.
However, in the short term, the break below 1.2860 opens the door to further losses to 1.2750. USDCAD needs to trade above 1.2915 to target 1.3000.
Chart: USDCAD daily
Source: Saxo Bank
The week ahead
The week ahead could be a memorable one, depending on how Europe, China and Japan respond to President Trump’s tariffs.
Monday. FX activity will be driven by the response to the nonfarm payrolls report or any tit-for-tat trade tariffs levied against the US. Data wise, there isn’t anything of note.
Tuesday: The UK budget will be of interest to Brits but not so much for anyone else unless economic forecasts change materially. US inflation data will be closely watched to see if last month’s gains are equalled, leading to predictions of higher rates, sooner.
Wednesday. The Bank of Japan monetary policy meeting minutes from the March 9 meeting are released. AUDUSD traders will be looking for a rebound in consumer sentiment from the earlier result of 102. They will also be leery of China retail sales and industrial production data. Eurozone industrial production data could support European Central Bank president Mario Draghi’s dovish outlook. US retail sales, PPI and business inventories data may give the greenback a boost.
Thursday: The Swiss National Bank policy decision is on tap. Then, second-tier US data, including the Philadelphia Fed manufacturing survey and NAHB housing market index.
Friday: Eurozone inflation data, US housing starts, building permits, industrial production and Michigan consumer sentiment will close out the week.
The week that was
It was expected to be a busy, volatile week., dominated by trade war fears. It was.
Monday: FX markets were closed in Australia. German politics and US tariff threats dominated trading. EURUSD drifted higher all day, helped when Germany’s Angela Merkel finally formed a coalition government. The Italian election results were inconclusive. UK Services PMI data underpinned sterling. USDCAD soared when Trump tweeted that Canada may not be exempt from new tariffs. Wall Street rallied, in the belief that the tariff talk was all bluster.
Tuesday: Asia and European FX markets were uneventful. Trade war fears eased on talk that even Republicans, including White House economic advisor Gary Cohn, did not support the tariffs. The Reserve Bank of Australia left rates unchanged and issued a neutral statement which was expected.
Things got exciting at the New York open. A Bloomberg headline said North Korea was will to scrap its nuclear programme. Financial market channelled former UK Prime Minister Neville Chamberlain, saying “peace in our time” and scrambled to buy risk assets. Oil prices rallied, but the move did not survive the day. Wall Street rallied sank and rallied again, closing with small gains. By the end of the day, North Korea was forgotten because of fresh turmoil in the White House. Economic adviser Gary Cohn quit in protest of the tariffs.
Wednesday: Asia FX markets were thrown into turmoil when they opened, because of Cohn’s resignation. USDJPY plunged, falling from 106.17 to 105.46 on fresh risk aversion selling. AUDUSD dropped to 0.7773 from 0.7827 with softer Aussie Q4 GDP data adding to the pressure. EURUSD drifted higher in Europe ahead of Thursday’s ECB meeting. Brexit concerns undermined GBPUSD. Reports that Trump would announce the tariffs on Thursday. And a cautious Bank of Canada statement lifted USDCAD. Wall Street finished on a mixed note. Oil prices closed with losses due to concerns about rising US inventories.
Thursday: Asia markets and the European morning session were quiet ahead of the ECB meeting later in the day. AUDUSD could not hold gains made after a better than expected trade report. USDJPY drifted sideways and opened in New York unchanged from Wednesday’s close. GBPUSD peaked in Asia then drifted lower during the European morning. EURUSD inched higher on expectations of a mildly hawkish tweak to the ECB statement. The ECB dropped the warning that “less favourable conditions could lead to increased asset purchases regarding size and duration.” The FX market was somewhat satisfied until Mario Draghi’s press conference. He pointed out the statement still included the promise to run asset purchases until September 2018, or beyond”, emphasising “beyond.” Doves still reigned, EURUSD plunged and the greenback rallied across the board. The exception was the Loonie which popped after Trump exempted Canada from steel and aluminium tariffs.
Friday: FX markets were quiet until the US employment data became available. It was better than expected but a drop in average hourly earnings may have limited gains. Canadian employment data was weaker than forecast but USDCAD was undermined by relief from trade tariffs.
– Edited by Clare MacCarthy