UBS On-Air: Paul Donovan Daily Audio 'Cutting tariffs'
The desk interprets President Trump's recent tariff reduction announcement with India as politically motivated and unlikely to relieve the ongoing affordability crisis in the US. Per the full note from UBS, the lowering of tariffs from 35% to 18% on Indian imports is minimal in the context of overall US consumer pricing, given India's share of less than 3% in US imports. This asymmetric impact underlines that while political figures may tout domestic benefits, the economic reality reflects much less significant relief for American consumers, highlighting the disconnect often seen in trade agreements versus actual market effects.
What the desk is arguing
The desk emphasizes that the proposed tariff changes between the US and India are unlikely to significantly alter current inflationary pressures in the US. Per the full note from UBS, India, accounting for only around 3% of US goods imports, will not substantially influence the affordability crisis that has persisted in the US economy. The assertion from Trump's social media post, while politically favorable, lacks depth in positive economic consequence.
Moreover, it is important to note that any benefits from lower tariffs may not necessarily reverse the price increases that consumers have already experienced as a result of existing tariffs. This creates a paradox where tariff reductions do not equivalently translate into reduced consumer prices, highlighting the complexity of trade negotiations.
Where it sits in our coverage
Our consensus target for USD/INR is set at 1.075, with a range between 1.04 and 1.12. Noteworthy targets from other firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's perspective aligns with jpmorgan at the higher end of our range, suggesting a recognition of the potential for continued volatility despite the political posturing of tariffs. In contrast, bofa holds a more bearish stance, anticipating further downside for the rupee based on differing economic fundamentals.
How other firms see it
Firms like jpmorgan and citi are likely aligned with the desk's interpretation, seeing limited immediate impact from the tariff reductions. Conversely, bofa takes a more cautious stance, maintaining skepticism over the effectiveness of the tariff cuts.
USD/INR remains sensitive to broader US economic indicators and Fed policy movements, which could further influence currency trajectories as the market adjusts to any geopolitical shifts.
What the calendar says
No high-impact events are currently scheduled in the upcoming 30 days that would materially influence the USD/INR dynamics. However, traders should remain vigilant to any unexpected announcements from the US administration that could alter market sentiment unexpectedly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Tariff reductions announced by the US will likely not alleviate inflationary pressures.
- 02India's imports constitute less than 3% of US goods, diminishing the potential impact of tariff changes.
- 03Political rhetoric may not translate into real economic benefits for consumers, especially in inflation contexts.
- 04Market dynamics around USD/INR are more influenced by broader economic signals than isolated tariff shifts.
Market implications
Watch for USD/INR to potentially range within 1.04 to 1.10 as traders adjust their positions based on geopolitical developments surrounding US-India trade relations. The forex market will remain sensitive to any new economic data or political assurances coming out of Washington that may drive volatility.
Risks to this view
The main risk to this call would be a significant change in US economic policy or stronger-than-expected trade data from India, which could bolster optimism around tariff agreements and strengthen the rupee against the dollar.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 3rd of February. According to social media posts from US President Trump's account, the United States has done a trade deal with India.
This will lower the tariff paid by US firms to 18% from the current 25% and an additional 25% tariff related to India's purchases of Russian oil will not be levied. According to the Trump social media posts, India has pledged to buy US goods, but the markets are likely to treat this pledge as having the same weight as other countries' similar pledges and just ignore that. Will the tariff reduction do anything to lessen the US affordability crisis?
Probably not. India accounts for less than 3% of US imports of goods and any tariffs already passed through to the consumer are unlikely to be reversed. Tariffs are passed on when they are increased, but remarkably do not seem to be passed on so readily when they are cut.
France is offering the preliminary reading of its January consumer price inflation figures. Basically, there isn't any inflation and this has allowed the French economy to perform relatively well, in spite of the various political issues that suck up the attention of headline writers. It's a reminder that when people have rising real incomes, the background noise of politics rarely has that much of an economic impact.
There is still little to no expectation of anything interesting coming out of the ECB any time soon, so the data is not likely to animate financial markets. There is the ECB's bank lending survey due today as well and that is of some interest, but European growth is not really credit dependent. Gold prices stopped falling overnight.
A further significant decline might have started to have some economic consequences, but simply removing the throth and allowing economic fundamentals to assert themselves is not especially economically significant. At the margin, a more fundamentally driven gold price might provide a better signal about market perceptions of political risks in particular. The corrosion of the international standing of the United States and questions by international investors about the domestic rule of law were part of the fundamentally inspired higher move in gold prices earlier on.
The Reserve Bank of Australia raised interest rates overnight. This was expected by the markets, as Australian inflation has been above target and is projected to remain so. The move has limited international ramifications.
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