UBS On-Air: Paul Donovan Daily Audio 'The retreat paradox'
Recent developments in U.S.-Canada trade relations suggest a significant potential impact on the U.S. consumer market, particularly with potential tax increases on imported Canadian goods. Per the full note from UBS, a new proposed tax of 35% could apply to a broad array of Canadian products, despite previous concessions made by Canada on digital taxes. This situation underscores the unpredictability of U.S. trade policies under the current administration, which often creates uncertainty for market participants and raises questions about the effectiveness of trade negotiations. The current state of equity markets suggests a belief that any such tariffs would be rolled back, but conflicting signals exist as commodities like oil— crucial for the U.S.— face ongoing tariff ambiguity. Overall, the likelihood of retreat from these proposed tariffs is high, given the historical context and market reactions.
What the desk is arguing
The desk posits that the substantial tax levies proposed on Canadian products could ultimately lead to U.S. consumer price increases and dissent from U.S. businesses. Per the commentary, the vagueness around the implementation and scope of these taxes suggests a retreat is possible, especially given prior behavior exhibited by the Trump administration regarding tariffs.
UBS indicated that whether the 35% tax applies broadly or is limited to specific products will greatly affect consumer sentiment and spending. Should major brands voice their concerns over price increases, the administration may be compelled to reconsider the implementation of such tariffs.
The alternative read would be that these taxes might not roll back despite pushback from businesses, which could fuel long-term inflationary pressures within the economy and complicate existing trade dynamics.
Where it sits in our coverage
Our current consensus for the USD/CAD is set at 1.075, with a range spanning from 1.04 to 1.12. For reference, notable targets are as follows: - jpmorgan: 1.10 - bofa: 1.04
While the desk's outlook suggests a softer approach from the U.S. given market pressures, it leans towards the upper bound of the identified range, suggesting a more cautious view regarding escalating trade tensions than some peers that may reflect more optimism in the current dollar strength.
How other firms see it
Firms such as jpmorgan and bofa are generally aligned with the desk’s assessment regarding potential risks to trade dynamics affecting USD/CAD rates.
The trajectory of the USD against CAD may not only hinge on trade-related tariffs but could also be influenced by broader market reactions to the Federal Reserve’s interest rate policies and commodity price stability, especially in oil markets where Canada has significant stakes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Potential U.S. tax increases on Canadian imports could raise consumer prices.
- 02The ambiguous tax scope may prompt the Trump administration to reconsider tariffs.
- 03Current equity market signals may indicate a belief in tariff rollbacks despite suggested impositions.
- 04The trade narrative reaffirms the need for traders to monitor commodity prices, particularly oil.
Market implications
Traders should keep an eye on the positioning of USD/CAD around the 1.075 mark, as any news regarding these tariffs could trigger volatility. Additionally, observe market sentiment leading up to key trade announcements, which may impact perceptions of U.S.-Canada relations.
Risks to this view
If the U.S. administration firmly implements the proposed tariffs without retreat, inflationary pressures may heighten, leading to increased volatility in USD/CAD. Additionally, significant backlash from key U.S. business sectors could create an environment of political pressure, prompting a reassessment of the tariff strategy.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 11th of July. Yesterday's US tax increase was potentially quite sizeable, a 35% tax on US consumers of Canadian product.
This comes in spite of Canada making concessions over digital tax, raising questions about the value of offering concessions during trade negotiations with the United States. However, as is often the case with pronouncements from US President Trump, it is not quite clear how heavy the tax burden on US consumers is going to be. This might apply to all products from Canada, or it might apply to only those products which fail to meet the requirements of the revised NAFTA accord, which are currently taxed at 25%.
It is also not clear whether oil, currently taxed at 10%, is to be included, as the United States really needs Canadian oil and does not have an alternative that it can put into its refineries. Trump also suggested that then when they were tired of the lost art of letter writing, all other imports into the United States would be taxed at 15% or 20%, which presumably means the penguins of the Heard and Macdonald Islands have their answer in the trade war. The instinct is to assume that Trump will retreat.
Such taxes would be higher than markets are expecting. Of course, because of lags, the US consumer would not feel many of these taxes for some months, but the tax on Canada could have a more immediate effect. The cries of anguish from US companies and the noticeable rise in food and fuel prices should lead to a retreat.
Trump seems very happy in retreat mode and has deployed it so repeatedly in the last six months as to make it the default policy assumption. However, yesterday Trump did note that markets seemed to like tariffs with equities hitting new highs. This creates a paradox.
Markets are up because they believe Trump will retreat. But if markets are up, that reduces the prospect of Trump retreating. There are three weeks or so for investors to find out which way things will fall.
UK monthly GDP is very noisy and its use is mainly for political point scoring rather than substantive economic analysis. The May data showed a decline against expectations of a modest gain, but there was a fairly sizable upward revision to March data, which makes the three-month change stronger than expected. Thus, there is something for every politician to argue about, and little for any economist to use with any degree of confidence.
The European Union is to receive its letter from Trump today with regards to trade taxes, and that will probably be the focus for investors, along with speculation about the prospects for a retaliatory tax in response. French final inflation is of little interest, as the numbers rarely change from the initial report. That's all for today.
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