UBS On-Air: Paul Donovan Daily Audio 'Canada, Iran, and US affordability'
The latest focus on US-Canada trade tensions, highlighted by significant tariffs imposed on $20 billion of imports, is expected to impact US consumers and the broader market environment. Per the full note from UBS, these tariffs, which could lead to an effective price increase of around 8% on both sides, present economic challenges that are distinct from typical inflationary pressures. With the specter of rising costs already driving affordability issues in the US, market participants will need to watch how this development influences Federal Reserve policy, particularly at the upcoming Jackson Hole conference.
What the desk is arguing
The desk believes that the escalation in trade tensions between Canada and the US, particularly the imposition of new tariffs, will exacerbate existing affordability issues in the US economy. Per the full note from UBS, these tariffs represent a direct attack on consumer purchasing power, impacting various sectors reliant on imported Canadian goods.
The desk notes that the $20 billion in tariffs could translate into a less than proportional price increase at the consumer level due to tariffs typically affecting only part of the price. Nonetheless, the anticipated rise in import costs will increase pressures on pricing and could compel the Federal Reserve to reassess its policy stance amidst rising affordability concerns.
Where it sits in our coverage
Our consensus target for USD/CAD is 1.075, with a range of 1.04 to 1.12. Key firms contributing to this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view appears to align with the broader consensus while sitting at the upper bound of the spread. The significant tariffs may push the USD/CAD pair closer to the 1.075 mark in the near term as market reactions unfold.
How other firms see it
Firms such as jpmorgan and citi align with this view and are monitoring the implications of the tariffs closely. In contrast, bofa presents a more skeptical stance, anticipating a less severe impact on the USD/CAD exchange rate due to historical resilience in Canadian exports.
Traders should keep an eye on related currency pairs such as CAD/JPY for indications of cross-market sentiment, as well as updates surrounding the Federal Reserve's policy decisions in light of inflationary pressures driven by tariffs.
What the calendar says
No significant economic events are scheduled in the coming month that directly affect the US-Canada landscape, but the market will be watching closely for any comments from the Federal Reserve at the upcoming Jackson Hole conference that may provide insight into monetary policy adjustments amid these pressures.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-Canada trade tensions have escalated with new tariffs on $20 billion of imports.
- 02The effective impact on consumer prices may be muted but could still weigh on US affordability.
- 03The Federal Reserve may need to respond to rising cost pressures amid uncertain communication.
- 04Watch for market reactions as tensions evolve and central bank policies are clarified.
Market implications
Traders should monitor the USD/CAD level, particularly around 1.075, for potential volatility stemming from tariff implications and Federal Reserve commentary. Positioning may be influenced by how these tariffs interact with broader economic themes, including inflation and monetary policy.
Risks to this view
Should the trade discussions between Canada and the US resume and lead to a rapid de-escalation of tariffs, or if the Federal Reserve signaling strong countermeasures against inflation, it would likely invalidate the current bearish outlook on USD/CAD.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Monday the 24th of August. The collapse of trade talks between Canada and the United States over the weekend has resulted in high tariffs being imposed on consumers on both sides.
The US consumer is being hit with tariffs on $20 billion of imports. It's worth stressing that there is a vast difference between the import price and the consumer price, so the percentage increase in the price paid by US consumers will be less than the 50% proposed tariff rate. However, tariffs on US buyers of Canadian goods have some differences from other tariffs.
China, for instance, became quite adept at helping its US customers avoid tariffs. Export and import data clearly suggests that exports from China to the United States were rerouted, presumably with the aim of minimising tariff payments by US customers. That is not economically viable for Canadian exports to the United States, so in this instance there is little prospect of reducing the tax burden for US importers.
Of course, there is a concern that the combination of tariffs and the US's still largely undefined economic warfare against Iran are going to keep the US affordability crisis very much in focus. That means that there will be pressures on the US Federal Reserve. These policies are raising the cost of living for US households, but they are not driven by economic imbalances.
They're the direct consequence of other policies entirely, over which the US Federal Reserve has no control. However, the obscure communication style of Fed Chair Walsh has meant that investors do not have a framework with which to assess how the Fed is most likely to respond to these particular policies, and indeed there are questions about whether Walsh will be able to direct Fed policy in the same way that previous Fed Chairs have done. The looming Jackson Hole summer camp for central bankers, at which Walsh speaks on Friday, assumes more importance against this backdrop.
We're also due to hear from US Treasury Secretary Besant today. Besant, or one of Besant's staff, has penned an article in the Financial Times today on economic warfare against Iran, but this was more rhetoric than precise detail. It does seem unlikely that the US administration will be rushing to apply additional taxes to US consumers of goods from China or the Middle East through tariffing imports from Iran's main trading partners.
Besant might again address the bond market after the failure of the $4bn bond-buying pledge. The question is what, if anything, Besant can do to shift market concerns. Declaring that growth will sort out the US fiscal problems is not convincing to anyone, and Besant's hints at having superior knowledge to the bond market are also not going to change investors' minds.
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