Top of the Morning: The week in review and preview
The desk interprets recent developments in U.S. trade policy as pivotal for market sentiment, particularly in equities, which could influence currency flows. Per the full note source, President Trump's extension of the tariff pause until August 1st suggests ongoing negotiations, but the immediate threat of new tariffs on various trading partners could heighten volatility. This context is vital for FX markets as traders assess the implications for cross-border trade dynamics. The prospect of new tariffs, including significant levies on Brazilian imports, may drive currency fluctuations in emerging markets in particular, while U.S. equities remain sensitive to tariff-driven headlines.
What the desk is arguing
The decision by President Trump to extend the 90-day tariff pause raises uncertainty around trade relations and market stability. This pause is critical for U.S. equity markets, which have responded positively, yet ongoing threats of new tariffs could bring volatility.
Moreover, the introduction of tariffs as high as 200% on specific sectors, such as pharmaceuticals, has the potential to disrupt not only equity valuations but also the broader economic landscape. Market participants should remain vigilant as the implications of these policy changes unfold.
Where it sits in our coverage
With our consensus target for USD/BRL sitting at 1.075 (range: 1.04-1.12), the desk's view aligns with jpmorgan's target of 1.10 for March 26, while diverging from bofa's more conservative approach at 1.04.
Given the recent developments and the tariffs on significant trading partners, our targets reflect heightened volatility and potential shifts in investment strategies as currencies respond to changing market dynamics.
How other firms see it
Firm sentiment is mixed with jpmorgan and goldman aligning on the bearish side of emerging market currencies, while bofa expresses caution, advocating for a more defensive stance in light of tariff threats.
Traders should monitor the USD/JPY pairing as it often reflects broader risk sentiment influenced by U.S. trade policies. Additionally, fluctuations in USD/BRL may emerge as critical to watch, given Brazil's new tariff status and its economic relationship with the U.S.
What the calendar says
Following this week's developments, traders should stay alert to any future announcements related to U.S. trade negotiations, as these could influence market dynamics significantly. The evolving tariff landscape requires close attention, especially with August 1st marking the next pivotal date for U.S. trade policy.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. trade policy shifts are currently driving market sentiment and could cause increased volatility across FX pairs.
- 02The extension of the tariff pause until August 1st presents both opportunities and risks for U.S. equity markets.
- 03Emerging market currencies like BRL are particularly sensitive to policy changes and tariff announcements.
- 04The threat of high levies on imports may deter investment and reshape trade relationships.
Market implications
Traders should watch for currency fluctuations, particularly in USD/BRL, as the tariff situation develops. The immediate landscape suggests heightened volatility ahead of the August 1 deadline, which may create entry points for opportunistic trades.
Risks to this view
A sudden shift towards implementing new tariffs, especially beyond what is currently announced, could lead to sharp reversals in market sentiment and positioning. Any significant agreement in trade negotiations could also stabilize currencies and equities unexpectedly.
Hi everyone, Siobhan Chapman here, and welcome to Top of the Morning on the UBS Market News podcast channel. It's Friday morning, which means it's time for the weekend review and preview conversation, where my guests will recap how markets have performed over the past few sessions and preview what you can expect in the week ahead. Joining us for the conversation today, I'm glad to welcome back Matthew Tormey, Equity Strategist Americas with the UBS Chief Investment Office.
Matt, welcome. We're happy to have you. Good morning, Siobhan, and thanks for having me back.
Let's get started. Heading into this week, there was a lot of anticipation over the direction of U.S. trade policy. What have we learned and how have markets been responding?
Yeah, there certainly was a lot of anticipation, Siobhan, because if everyone remembers in the week after Liberation Day, President Trump announced a 90-day pause to the reciprocal tariffs. And this week, that pause was supposed to come to an end. However, President Trump did end up signing an executive order on Monday, which did extend the pause to August 1st, allowing more time for trade negotiations.
Now, while the pause was extended, a number of letters were unveiled that were addressed to specific countries and what tariff rate would be applied to their imports. So just to recap a few of the most important developments, on Monday, the letters that were unveiled threatened new reciprocal tariffs on trading partners, which included charging 25% levies on imports from Japan and South Korea and 25 to 40% on goods from another 12 countries and smaller Asian economies in South Africa. On Tuesday, President Trump said that he would impose a 50% levy on copper imports and up to 200% on foreign drugs.
On Wednesday, a 50% tariff on all Brazilian imports was announced. And this came as a bit of a surprise to investors, given that Brazil was not on the initial list on Liberation Day, as the U.S. runs a good trade surplus with Brazil. And in our view, it's not clear on what grounds the U.S. would implement this tariff.
So given the possible legal hurdles, we think that the Brazil tariff threat is unlikely to become permanent. And just yesterday, President Trump threatened a 35% tariff on imports from Canada starting August 1st, which is up from 25% previously. And while details remain thin, a White House source did suggest the 35% tariff will not apply to goods compliant with the U.S.
MCA, with the caveat that this could change. And then in a separate broadcast, President Trump made the comment that all of the remaining countries are going to pay, whether it's 20% or 15%, suggesting a new blanket tariff baseline level. Now, how have markets responded to all these developments?
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