Trump Mexican tariff Tweets boost greenback
May 31, 2019
The greenback remains resilient amidst President Trump’s unsatiable need for confrontation on the geopolitical stage after he announced a plan to increase tariffs on Mexican exports as long as immigrants continue to flow into the US through Mexico. Trump’s plan is to start with a 5% tariff at the 10th of June and then ramp the rate up to a level as high as 25% if the Mexicans do not manage to stop the flow of people. The proposed tariff was quickly judged by economists and even Iowa Senator Chuck Grassley of Trump’s own Republican Party was fast to condemn the move, saying such tariffs can “seriously jeopardize the passage of USMCA”. White House foreign and trade policies continue to look capricious and often appear to be stemming more from a desire to please the voter base than that it finds its roots in long-term oriented, sound economic reasoning. This implies that more unexpected moves from the Oval Office should be expected as Trump slowly starts his warmup for the November 2020 Presidential Elections. Paradoxically, this can lead to more safe-haven flows into USD markets, which will strengthen the dollar – exactly not what Trump wants to have happen to the currency. The Federal Reserve’s favoured inflation gauge, the Personal Consumption Expenditures, will be released today at 13:30 BST.
Sterling was among the worst G10 FX performers yesterday and the currency has continued to trade lower after Prime Minsister Theresa May announced her departure last week. Chancellor of the Exchequer Phillip Hammond said he thinks a second referendum is preferred to a General Election as uncertainty about who will become the new PM – and with what kind of program – lingers on in the UK. Many might dispense with Hammond’s comments as his pro-Europe stances are well known and a second referendum may lead to the “Remain” option being elected after all. However, it does reflect well a sense of Realpolitik for the Conservatives, as the European Parliamentary election results suggested the Tories may easily lose the power to govern if General Elections were to be held today.
Ascension Day was celebrated in most of continental Europe yesterday, though it looked more like a Decension Day for the single currency, as EURUSD edged closer to fresh 2-year lows. Where Greece is becoming an unexpected success story as yields on 10-year government bonds hit fresh all-time lows earlier this week, another birthplace of Western civilization, Italy, seems to have become Europe’s new problem child. Italy is heading for a clash with the European Commission over its budget once again as the EC has given Italy until today to explain why deficit targets are not being met. Meanwhile, Italian Deputy Prime Minister and League leader Matteo Salvini has hinted he is willing to blow up the coalition if his flat tax plans will not be approved, indicating more uncertainty from the domestic political front may be due. If this were to occur, it wouldn’t necessarily be a euro negative story, as it means the current government may be replaced by one that’s more inclined to reduce Italy’s large fiscal debt position. All throughout the morning, German Consumer Price Index figures are released per state, which will tell us more about the inflation pressures in Europe’s largest economy after an Easter surge last month.
The loonie held firm yesterday despite a whopping 5% drop in WTI oil prices. This morning, however, CAD doesn’t look so slick as Trump’s tariff threat to Mexico endangers the USMCA deal that still awaits its final ratification in the US Houses. Today at 13:30 BST we’ll see March Gross Domestic Product, which will tell us whether the recent optimism by the Bank of Canada on growth turns out to be justified.