US driven trade tensions dominating market attention - Westpac

March 1st was when US president Trump confirmed reports that he would announce tariffs on steel and aluminium imports, which set the tone for the month, with US-driven trade tensions dominating market attention, according to Sean Callow, Research Analyst at Westpac.

Key Quotes

“April has started in the same nervous way, with equities volatile as China and the US detailed tariffs on each other’s imports and officials made bombastic declarations about how they were not afraid of a trade war. The optimistic view is that either (a) the US tariffs are simply an aggressive opening gambit by a master dealmaker, who knows better than to damage the US economy or (b) the scale of the actions announced so far will have little net impact on overall US or China trade or inflation.”

“It will be some time before we can make a final judgement on (a) but (b) is already problematic. The steps announced so far should not cause great damage to China’s export machine, while no one is likely to make major changes to their US GDP forecasts in response to China’s new tariffs. But if there’s little impact on yawning US trade deficits, will President Trump simply move on?”

“Passing an infrastructure package would require a great deal of negotiation with Congress, whereas every president has plenty of scope to impose trade penalties. Arguably, Trump is being true to his 2016 campaign platform and could double down on this into the November mid-term elections.”

“In the week ahead though, we might see at least temporary optimism around NAFTA, with reports that the outline of a deal will be announced later next week. CAD and MXN should extend recent gains if this proves the case but USD overall might struggle for direction as the jury remains well and truly out on how worried we should be about trade policy.”