UBS On-Air: Paul Donovan Daily Audio 'Budget battles'
The desk interprets recent US-Canada trade discussions, highlighting a shift in focus with Canada retracting its digital services tax, signaling a potential volatility in relations but viewing these developments as largely ignorable by the markets. Per the full note from UBS, the broader implications of US fiscal policy and President Trump's tax adjustments dominate the current narrative, overshadowing localized trade skirmishes. With US debt levels set to rise amid ongoing budget talks, the market is braced for increased borrowing dynamics, especially given private wealth remains at historically high levels. This situation compels traders to monitor fiscal signals closely as they grapple with this complex backdrop.
What the desk is arguing
The desk holds that recent adjustments in trade discourse between the US and Canada, characterized by Canada relinquishing its digital services tax, are less impactful than the underlying fiscal stresses in the US. According to UBS economist Paul Donovan, while the backdrop of US auto tariffs is slightly less severe than prior projections, the overarching fiscal issues are more pressing and are receiving less market attention than warranted.
Investor sentiment remains muted as discussions in Washington regarding budget policies appear convoluted, with Treasury Secretary Besant advocating for the removal of potentially detrimental tax regulations on foreign investors. This reflects broader concerns over US fiscal sustainability as the debt trajectory continues to show upward movement, despite record private wealth levels that could be mobilized to offset some fiscal challenges.
Where it sits in our coverage
While our internal coverage data does not currently specify a target range for USD/CAD, market consensus has seen firms like jpmorgan eyeing a target of 1.10 for December 2026, suggesting a moderately bullish outlook amidst the current fiscal concerns. However, bofa remains contrary, positioning at 1.04 for the same timeframe, illustrating a divergence in responses to these changing dynamics.
How other firms see it
Aligned firms, such as jpmorgan, take a cautiously optimistic view on USD/CAD, while bofa suggests a more bearish sentiment, reflecting differing assessments of the recent trade turbulence and underlying fiscal policies. These contrasting perspectives highlight the sensitivity of this currency pair to shifts in trade negotiations and fiscal infrastructure.
Relevant indicators that could impact this outlook include US Treasury yields and broader assessments of North American trade policy, which could steer significant market movements in the USD/CAD.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-Canada trade talks show volatility with Canada retracting a digital services tax.
- 02The US fiscal position continues to draw scrutiny as debt levels rise amid budget discussions.
- 03Market appears to overlook trade disputes in favor of larger fiscal health narratives.
- 04Private wealth levels in the US remain high, suggesting potential for mobilization against debt increases.
Market implications
Traders should monitor shifts in US Treasury yields and upcoming fiscal announcements, as any unexpected moves in these areas could greatly influence the USD/CAD trajectory. Key thresholds around 1.10 will be critical for reinforcing bullish positions.
Risks to this view
A significant contrary shift in US fiscal policy, especially in relation to foreign investment taxation, could escalate tensions and drive bearish sentiment in USD/CAD. Additionally, if Canadian policymakers implement stronger countermeasures against US tariffs, potential upside risks may materialize.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 30th of June. Over the weekend, US-Canada trade talks were stopped and then started again.
Unusually, this was not a unilateral US retreat, as Canada withdrew its digital services tax as part of the process. The whole process is something that investors are right to ignore. Today also marks a tax cut by US President Trump, as cars imported from the United Kingdom will only be taxed at 10%, not 25%.
That still leaves US auto buyers worse off than they were six months ago, but somewhat better off than they were last week. Meanwhile, the US Senate is tying itself into knots over budget issues. US Treasury Secretary Besant has asked the Senate to remove Section 899, which would have made it possible for foreign investors into the States to be taxed on a whim, specifically the whim of the US President.
That was not seen as helpful at a time when some foreign investors have been questioning the wisdom of investing in the United States at all. The market is assuming that US debt levels will continue to increase with the passage of this budget. Deficit reduction requires some rather heroic assumptions about growth and revenue.
The unsustainable US fiscal position is concerning, but it is also worth remembering that US private wealth is at a record high, and no doubt there will be efforts to mobilise that wealth as US government debt levels continue to increase. On the data calendar, we have German inflation numbers for June seen holding more or less steady. That was also broadly the case with the Spanish and French data that was published last week.
UK final GDP for the first quarter is also scheduled, which is not in fact really final data and which very possibly still under-reports UK economic activity. One of the problems in times of significant structural change is that a century-old concept like GDP is not necessarily measuring the right things in the right way. Japan and South Korea both reported weak industrial production figures for May.
Japan's data was pushed down by aircraft part production. Semiconductor production for Korea was less affected than were other sectors. These sorts of relative swings in different sectors are likely to be a feature as US trade taxes hit.
Some sectors will see reduced production if US consumers are price-sensitive. Other sectors will continue to produce if US consumers do not have ready substitutes and instead have to cut back on other spending to afford the imports. Ahead today we have the release of the comments section of the Dallas Fed Manufacturing Survey.
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