UBS On-Air: Paul Donovan Daily Audio 'Trade time'
The desk interprets recent stronger-than-expected trade figures from China, particularly in technology sectors, as a key bullish signal for emerging markets and commodity-related currencies. Per the full note from UBS's Paul Donovan, China's exports were bolstered by significant demand for high-tech goods, which constituted almost 30% of its total exports. This backdrop emerges just before the critical US trade data release, which could reignite tariff discussions amid a challenging geopolitical landscape. As traders assess positioning ahead of these events, insights from UBS and related trade statistics will be pivotal.
What the desk is arguing
The rise in China's exports, driven by technology demand, signals a potential shift in market dynamics favoring risk assets and EM currencies. According to UBS, the growth in China's high-tech exports, which soared due to global interest in artificial intelligence, paints a positive picture for regional trade recovery. This strong performance could suggest resilience in the face of ongoing geopolitical tensions and potential tariff adjustments by the US.
UBS highlighted that the strength in exports to the US was influenced by comparisons with prior volatility created by tariffs, suggesting a short-term distortion in data trends. The desk sees this as a crucial indicator ahead of US trade figures, which are likely to receive increased scrutiny from both markets and policymakers.
Where it sits in our coverage
The current consensus target for the relevant currency pair sits at 1.075, with a range between 1.04 to 1.12. Notable aligned forecasts include: - jpmorgan (target: 1.10, tenor: Mar26) - bofa (target: 1.04, tenor: Mar26)
This view aligns closely with jpmorgan, which expects an upward trajectory given the implications of the China trade data. The desk's stance is within the upper range of the consensus, emphasizing the potential for further dollar weakening against key currencies.
How other firms see it
Several firms are aligned with this bullish perspective, including jpmorgan, which echoes a similar outlook on risk appetites influenced by global trade trends. Conversely, bofa takes a more cautious stance, predicting a downtrend in the near term based on potential fallout from inflationary pressures and trade disputes.
Key pairs to watch include USD/CNY, as the interactions between these currencies will reflect broader trade sentiment. Additionally, upcoming statements from the Federal Reserve could have spillover effects on USD valuations relative to emerging market currencies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's exports rise driven by high-tech demand, especially in AI.
- 02The US import landscape is stabilizing, potentially easing inflationary pressures.
- 03Tariff discussions may reemerge, affecting trade dynamics.
- 04Risk assets may gain traction in light of improved trade data.
Market implications
Traders should focus on USD/CNY levels, especially in light of upcoming US trade figures. A break below 1.075 could signal further weakness in the dollar, while support for emerging market currencies could solidify if the trend continues.
Risks to this view
A resurgence in US tariff rhetoric or negative trade data could reverse current bullish sentiment. Additionally, any signs of deterioration in China's economic performance could dampen the outlook for related currencies.
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 9th of June. China's May trade data showed the dominance of the global desire to play with the nice shiny new toy of artificial intelligence.
Technology exports led the strength in the numbers, although the data with regards to the United States is flattered by comparisons to US President Trump's tariff announcements last year which caused quite a lot of volatility in the figures. High tech accounted for almost 30% of China's exports. Recent months have also seen very strong performance by the electrification big three, electric vehicles, lithium batteries and solar panels.
China's data comes ahead of US May trade figures. These once again assume heightened importance as the US administration is clearly frantically searching for reasons to levy tariffs on US buyers of imported goods, hence the latest focus on forced labour and environmental reasons, normally arguments used by the Democrats to justify charging US households more money. In the aftermath of the volatility in imports created in anticipation of the now defunct wave of tariffs from last year, US import growth has resumed and the two periods when import growth into the United States has hit an all-time high by value were immediately ahead of last year's tariffs and last month.
Trade is not going to disappear as a political issue as the renegotiated NAFTA deal is again up for discussion over the course of the summer. In the United Kingdom, the British Retail Consortium's shop sales measure, which is a value index but which does not include petrol sales, saw a strong reading. Technically it was stronger than forecast but as only three people actually bothered to forecast this data, the idea of an economic consensus is perhaps best dismissed entirely.
There was warmer weather towards the end of the month but the general message is that, as in other economies, the UK consumer still has the ability to spend on non-oil products through judicious shifts in their savings behaviour. The UK may also be under-reporting household incomes in its high-frequency data because of the rise of self-employment and the side hustle, although on the other side of the transaction, the British Retail Consortium data does not capture spending in the TikTok shop. Iran and Israel both announced an end to missile exchanges yesterday, statements which markets are inclined to give some credibility to.
Statements from the US around the ongoing war are not carrying as much weight with investors. However, even the optimism bias can only go so far and the potential for problems is never that far from the Middle East region. Oil prices are slightly lower but the economics of the situation hasn't really shifted very much.
That's all for today. Have a good day. Collectively referred to as UBS.
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