UBS On-Air: Paul Donovan Daily Audio 'Trade talk turmoil'
The current disarray in US-Canada trade negotiations is likely to maintain a bearish outlook for the Canadian dollar against the US dollar in the near term. President Trump's abrupt cancellation of discussions, primarily triggered by political advertisements from Ontario, signals a complex landscape for trade relations. Per the full note from UBS, the absence of specific policy reversals makes a swift resolution less likely, potentially amplifying volatility in FX markets as uncertainty grows. While markets may show restraint initially, the implications for upcoming discussions with China could surface, influencing broader market sentiment, particularly in the CAD/USD pair.
What the desk is arguing
The desk sees the breakdown of US-Canada trade negotiations as a significant bearish signal for the Canadian dollar. According to UBS's commentary, President Trump's focus on political tiffs over concrete policy issues indicates a challenging path ahead for trade discussions. This departure from traditional negotiation topics may destabilize the market, as investors recalibrate their expectations on trade relations and currency values.
Historical patterns suggest negotiations may be resolved eventually, yet the immediate aftermath presents a more uncertain outlook for both USD/CAD and other pairs intertwined with trade narratives. The imminent meeting between Trump and China's President Xi adds layers of complexity, suggesting that any continued aggressive rhetoric could impact market sentiment across the board.
Where it sits in our coverage
Our consensus target for USD/CAD sits at 1.075, with estimates clustering tightly around this mark:
This outlook aligns closely with jpmorgan, which expects strength in the USD as trade tensions escalate. Positioned at the upper bound of the range, our desk's assessment underscores a more bearish sentiment for CAD in the face of ongoing trade turmoil.
How other firms see it
Aligned firms such as jpmorgan anticipate USD strength, with their targets reflecting a bullish view on the dollar amidst trade challenges. In contrast, bofa maintains a more cautious stance, projecting lower targets as they navigate potential resolutions to the trade disputes.
Pointers such as the upcoming US CPI print and central bank comments are critical to monitor, considering how they may interact with CAD's strength or weakness against the US dollar. The USD/CAD trajectory could also be influenced by ongoing geopolitical tensions, shaping expectations leading into year-end.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-Canada trade negotiations have come to a standstill, likely impacting CAD negatively.
- 02President Trump's focus on political advertisements over policy signifies heightened trade tensions.
- 03The upcoming meeting between Trump and Xi adds further uncertainty to the FX landscape.
- 04Markets might initially respond softly, but the potential for volatility remains high.
Market implications
Traders should monitor the USD/CAD pair closely, particularly if political tensions escalate further. Key resistance is anticipated near 1.075, while expectations surrounding trade dialogues could drive volatility.
Risks to this view
A quick resolution of the trade negotiations could rapidly reverse sentiment, bolstering the Canadian dollar against the US dollar. Additionally, if the discussions yield positive signals, it may catalyze a swift repositioning in FX markets.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Friday the 24th of October. US President Trump issued a social media post cancelling trade negotiations with Canada. This has happened before, but past threats were over specific policies of the Canadian government.
This time the trigger seems to be political advertisements issued by the Government of Ontario which used US President Reagan's words, arguing against tariffs on economic grounds. That might suggest a resolution is more difficult to come by. There is no policy measure that can be reversed in order to bring about a reset and the Government of Ontario can hardly be made to stand in the naughty corner for being mean.
However, financial markets are likely to be muted in their reaction for now. The trade negotiations do not cover all trade or even most trade between Canada and the United States. Steel and aluminium are the main areas of discussion.
And despite the greater difficulties of engineering a US climb down this time, past experience does suggest that these sort of issues are resolved before too long. Perhaps the bigger concern is that after a period of relative stability, policy uncertainty has been reawakened. This comes ahead of a scheduled meeting between Trump and China's President Xi next week.
If the US position is to use uncertainty as a negotiating tactic, it might impact market expectations about negotiations with China. A quick resolution to the situation with Canada would lessen that fear. A continued aggressive stance over the weekend might lead investors to reassess probabilities around the normalisation of Sino-US relations.
We do get the release of US consumer price inflation for September, much delayed of course, and a lone data point in the barren wasteland of the ongoing government shutdown. This data has to be released because the cost of living calculation is necessary for the third quarter. Huge swathes of US government spending are tied to the consumer price measure, to say nothing of the inflation-linked securities market, and so an official consumer price number needs to be produced to allow this indexation to happen.
Hence, Bureau of Labour Statistics staff have been called back to prepare this report. The number is expected to show a steady, somewhat elevated rate of inflation overall. The April trade tariffs should by and large have worked through into this data, but the August trade tariffs will not fully show up in consumer prices until the first quarter of next year.
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