UBS On-Air: Paul Donovan Daily Audio 'Credit where credit’s due?'
The desk perceives that the lack of timely US trade data due to governmental dysfunction could hinder market sentiment around USD valuation. Per the full note, Paul Donovan highlights how trade metrics are convoluted by both tariff evasion tactics employed by exporters and inventory management responses to anticipated tariffs. As credit conditions in the US appear stable, the backdrop suggests that consumer demand might not be as compromised as previously feared, supporting a measured view on currency movements despite the data void.
What the desk is arguing
The desk argues that the absence of September trade data could lead to increased volatility in the USD, as traders grapple with uncertainty. Per the full note, the tactics used by exporters to navigate tariffs mean that traditional trade balances may not reflect underlying economic realities, complicating the USD outlook.
Donovan also points out that the recent senior loan officer survey from the Federal Reserve did not indicate that credit constraints were hampering economic activity. This suggests a robust demand for credit that might bolster consumer spending, indirectly supporting the USD in the near term.
Where it sits in our coverage
Our consensus target for the USD is 1.075 for the coming months, with the following institutions providing insights:
The desk's view aligns closely with jpmorgan's forecast, sitting at the higher end of the spectrum, indicating confidence in the dollar despite current trade uncertainties.
How other firms see it
Firms such as jpmorgan and citi are aligned with the desk's outlook, showing a general bullish sentiment towards the USD given stable credit conditions. In contrast, firms like bofa maintain a more cautious stance. The dichotomy suggests a potential divergence in expectations regarding economic recovery and currency strength.
Looking at the USD/CAD relationship could provide additional insights, particularly if commodity prices remain volatile, influencing trader sentiment across markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US trade data delays could increase USD volatility
- 02Stable credit conditions may boost consumer confidence
- 03Complexities in trade balance reporting hinder economic clarity
- 04Disruption in data flow complicates market reactions
Market implications
Traders should monitor the USD/USD pair closely, especially if forthcoming data releases reinforce current bullish sentiment. Key resistance levels around 1.075 will be significant in guiding position decisions, particularly in light of market reactions to any unilateral trade policy announcements.
Risks to this view
A sudden shift in tariff policies or unexpected trade agreements could reverse current USD trends, particularly if they lead to a surge in trade imbalances. Additionally, any signs of credit tightening impacting economic growth could destabilize bullish sentiment.
Good morning. This is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's four o'clock in the morning, London time, on Tuesday the 4th of November.
The United States would be publishing trade data for September today if it had a functioning federal government. It doesn't, so it won't. Unfortunately, this is not data that we can readily calculate by using international sources.
Under US President Trump's first term, China's exporters became adept at re-routing exports to the United States via third-party countries in order to avoid tariffs. So what is recorded as an export to the US may not reflect what the US actually thinks is happening. US trade balance has further been distorted on a month-by-month basis by stockpiling and then consuming inventory as companies have tried to anticipate tariffs.
Only certain sectors have been able to do this overall. Limited substitutes and US companies raising their prices has limited the loss of market share of exporters to the United States. The US did release one piece of data yesterday with the senior loan officer's opinion survey from the Federal Reserve.
This is survey-based evidence which would normally have to be treated with considerable caution. However, if the regulator of your sector is asking the questions, as is the case here, there is almost a compulsion to answer. The data did not suggest that tight credit standards or the cost of credit were limiting US economic activity.
Much of the consumer's demand for credit was reported as steady and while there may have been some tightening of standards for commercial lending, this does not appear to have been a constraint in a macroeconomic sense. The pattern of credit availability has been repeated more or less on the European side of the Atlantic. It doesn't suggest that monetary policy has been exceptionally repressive in either region.
This rather underscores the idea that recent US rate cuts are more an insurance against labour market brittleness than a deliberate attempt to counteract credit tightening and stimulate growth. Were tightening standards reported, policy uncertainty was often cited as the cause. Labour market concerns were flagged up by Fed Governor Cook in remarks yesterday, although Cook also highlighted that the tariff effects on inflation will not be fully felt as yet.
That's really a story for early next year. Today, we get a lot more European central bank talk, including remarks by ECB President Lagarde, but this is likely to provoke only a very muted market reaction. A polite way of saying that markets are just not in any way interested.
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