UBS On-Air: Paul Donovan Daily Audio 'The bigger picture on trade'
The desk interprets the upcoming US June trade balance data as a crucial indicator for understanding the shifting dynamics of the US economy and trade relationships, particularly in the context of trade taxes and service exports. Per the full note from UBS, the US trade balance, which incorporates goods and services, is expected to reflect a significant goods deficit offset by a growing services surplus, especially in relation to the EU. The anticipated data, however, could be impacted by ongoing tariffs and residual stockpiling behaviors. Without clearer policy signals, the risk to investment levels and trade dynamics remains elevated.
What the desk is arguing
The forthcoming US trade balance data for June is expected to reveal contrasting trends in goods and services that could influence market perceptions of the US economy's health. According to UBS, while the goods deficit remains substantial, the services sector is showing a notable surplus that can mitigate this deficit. This nuanced understanding is critical for traders directing their strategies around USD pairs.
The expectation is that the trade balance will illustrate a goods deficit that has been influenced by stockpiling and tariff impositions, suggesting potential volatility in tradable goods. For instance, the tariffs and previous stockpiling activities are leading to questions about how US exports will shape up moving forward, an aspect highlighted by UBS.
Moreover, without a clear resolution to trade policies, the viability of the recovery in investments remains uncertain. UBS notes that the transition towards a more efficient capital use strategy is also redefining investment flows and could limit the potential benefits that trade taxes were expected to generate.
Where it sits in our coverage
Our current consensus target for the USD/EUR pair is pegged at 1.075, with a range between 1.04 and 1.12 based on various firm assessments. Notably: - jpmorgan targets 1.10 for March 26 - bofa forecasts a lower target of 1.04 for the same tenor
This outlook suggests that while the desk holds a relatively optimistic view at the higher end of the target spectrum, it does not necessarily align with the lower expectations from bofa, indicating a divergence in trade outlook assessments.
How other firms see it
In aligning with the desk's perspective, firms such as jpmorgan remain bullish on the USD due to potential service sector strength impacting the overall trade balance. Conversely, firms like bofa express a more cautious stance, emphasizing concerns over goods trade deficits and worsening investment outlooks.
Related pairs to monitor include USD/JPY, as shifts in trade dynamics might have wider implications across currency relations, particularly reflecting on central bank policies influenced by trade metrics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US June trade balance is likely to show a significant goods deficit with an offsetting services surplus, reflecting complex trade dynamics.
- 02Anticipated data may be influenced by residual stockpiling and ongoing tariffs, highlighting market volatility.
- 03Investment levels are uncertain due to policy ambiguity, impacting future recovery in trade and economic performance.
- 04The desk maintains a bullish stance on USD despite mixed projections from other market players.
Market implications
Traders should watch the USD/EUR pair closely, particularly around the 1.075 mark, as the upcoming trade balance data could influence market sentiment. A pronounced services surplus might lend support to the dollar, while continued weakness in goods trade could signal downward pressure.
Risks to this view
Reversal of this trade view could be triggered by unexpected shifts in tariff policies or a marked decrease in service export performance, both of which might skew the trade balance unfavorably against projections.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 5th of August.
After a rather varied approach to trade taxes over the course of the past three months, we'll be getting the US June trade balance detailed today. This is on the balance of payments basis and it includes the trade in services. Adding services will reduce the scale of the US deficit.
With the EU for instance, the deficit in trading goods is almost entirely offset by a US surplus in trade in services. The trade in goods is still likely to be affected by trade taxes. Stockpiling in anticipation led to higher imports earlier on this year and there is likely to be some payback from that now.
However, US goods exports also have some more minor distortions. There has not been any incentive to stockpile but there have been one or two tariffs in retaliation and boycotts of US goods, especially consumer goods, are a thing. Is the US going to be turned into an export powerhouse by this tsunami of taxation?
It is not likely. For one thing, the investment boom in building factories that developed over the last four years appears to be failing in the face of the current policy uncertainty. Investment has been attracting the attention of the OECD who are suggesting that a lack of corporate investment is imperiling growth.
The OECD notes that there has not been a return to pre-pandemic levels of investment. However, this analysis can be challenged. Why should investment return to pre-pandemic levels?
A lot of pre-pandemic investment involved unnecessary duplication. The trend now is towards a more efficient use of existing capital. For instance, an economist toiling for long hours to try and bring a hint of rationality to an irrational world needs an office space, desk, computer, coffee machine and so forth.
But if they are working from home, those things can be supplied from the existing stock of consumer goods that the economist already owns. There's no reason for the economist's employer to provide those things, and that would have been considered investment. Rather, the unnecessary duplication of desks and coffee machines can be replaced with a more efficient use of what already exists, and lower investment produces the same living standard.
Whether that living standard is properly reflected by so crude a measurement as GDP is a completely different question. The uncertainty around trade taxes, which may have been a hindrance to investment as adding another layer of risk, does not appear to have disappeared entirely. US President Trump is threatening more trade taxes on imports from India, having expressed displeasure that India has been buying oil from Russia.
The random number generator nature of the tariffs, and the wide range of reasons for their imposition, may make defending the legality of a lot of these taxes quite difficult. There are assorted business sentiment surveys today. While these are likely to be free from political interference, they are not free from political bias.
People often answer questions in the way that they feel they should, rather than with an objective analysis of the facts. And the way they feel they should answer questions are likely to be shaped by political and media climates in which they inhabit. Euro-June producer price inflation is not likely to change policy outlooks, but the details may be of some interest when compared to US producer price trends.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
It's subsidiaries or affiliates, collectively referred to as UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG, and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
This material is for your information only, and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS.
Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story