More Tariffs, More Problems

USD: Trump decides to tax US consumers further

Yesterday saw the trade war between the US and China escalate further as the Trump administration clarified its intent to raise tariffs on $200bn of Chinese exports to the US from 10% to 25%. These tariff increases will go live on Friday despite trade talks between the two countries continuing today in Washington.

As a reminder, especially given the conversation around trade and tariffs that are part of every Brexit conversation, a tariff is a border tax on the buyer, not the seller—tariffs make it more expensive for a buyer to import a good into the country. The specific mechanism within these current plans is that the US importer must pay the tariff to US Customs before the goods are released to the importer at the border. Despite what the President may say this is a tax on US consumers, not Chinese manufacturers.

The goods affected are numerous – the appendix to the document that outlines the tariff increase is itself 186 pages long – but the increases taxes are focused on food, building materials, chemicals, tires, wood/paper, fabrics, glass, steel and other metals, engine parts, TVs and monitors and measuring instruments. EU importers of these goods may be able to extract some discounts from both Chinese exporters and US importers in the coming months should the trade tensions continue.

The currency reaction has been exactly as expected; the yen and US dollar strengthening and emerging market/trade-focused currencies pushing lower. Only an announcement reversing the tariffs or a deal that prevents the need for their enforcement will see this risk-off trend reverse in the short term

GBP: Still not the end of May

Sterling was unmoved yesterday by further discussions around the future of the Prime Minister. Rumours had been that she could be ready to submit a timetable for her leaving Downing St yesterday. Her spokesperson had other ideas and announced that “She is here to deliver Brexit in phase one and then she will make way for phase two.” No help there then.

As we mentioned yesterday, our expectation for sterling remains that things trade largely within the ranges that they find themselves in now until the picture around the European elections becomes more clear. The UK and the wider EU go to the polls in a fortnight’s time.

AUD: A lack of faith

The wash over from the Reserve Bank of Australia’s decision to hold interest rates on Tuesday and the Reserve Bank of New Zealand to cut rates yesterday has been for the market to only increase its bets that the RBA will end up following the RBNZ in cutting interest rates. The AUD is now weaker than it was before Tuesday’s announcement and until the market gets a pronouncement that it is more inclined to believe, both on rates and the economic performance of the Australian economy, then we expect the AUD to be pressured ever lower.

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