G10 risk currencies continue to move in one overall direction – Down. Trade issues, structural risks, and partner country exposures continue to count against the risk side of the G10. The USD, however, remains in a position of ultimate strength.
The August Non-Farm Payrolls on Friday has all but locked in a further 6 rate hikes by December 2019 as US employment remains at some of the strongest rates since the end of the second world war and remains unaffected by trade issues and changes to monetary policy. Couple the employment data with the current GDP read of 4.1% year on year and PCE read of 2% – economically the US is humming and the USD, therefore, is monstering everything.
Why risk currencies are facing even more pressure is geo-politics is moving into a new phase, and it all leads back to the White House and the upcoming November Mid-Terms.
Over the weekend the US Trade Representative not only took the final steps to allow the Trump administration to enact the proposed US$200 billion of additional tariffs on Chinese exports but suggested that the administration was now looking at putting a tariff on a further US$267 billion worth of Chinese exports. This would take the total amount of tariffs on Chinese goods to $517 billion (US$50 billion in circulation, US$200 billion now to be written into law and the new proposal of US$267 billion) which is the total value amount of Chinese exports to the US in 2017.
The net trade deficit the US runs with China currently stands at US$390 billion. This proposed third tariff setup would blow right past the net position – which was the justification for the tariffs in the first place – we are entering a new era.
To illustrate the impact this will have on the global economy and global currencies, Morgan Stanley released a report that has worked through possible impacts of the White House continues down the tariff option.
It takes the current tariff settings as ‘baseline’ which is the 25% tariff on steel, 10% on aluminum plus the 25% tariff on US$50 billion of goods from China. It then looks at three possible escalations on the baseline.
I wont to concentrate on the ‘worst case’ scenario, which was for ‘the US moved into a full-blown trade war where it took its tariffs on China to the maximum at 25%’ (this is exactly what was proposed over the weekend) and for ‘all goods from the EU to be tariffed at 25%’ (there have been signs this proposal may be coming – the President two weeks ago suggested putting a 25% tariff on all European Cars).
The bank sees this scenario impacting global trade by 81 basis points. From an Australian-centric point of view the impact on China is estimated to be 150bps the US 99bps these nations are Australia’s number 1 and number 3 global trading partners, again the AUD is facing downside risks and over the coming 6 weeks, all this will come to a head.