UBS On-Air: Paul Donovan Daily Audio 'Trading around the US'
The desk believes that the recent spikes in import taxes by the US, notably a proposed 100% tariff on microchips, highlight a significant shift in trade policy that complicates the operating environment for manufacturers. After the implementation of these taxes, President Trump's nuanced exemption for certain large exporters suggests a strategy aimed more at managing market perception than creating substantial economic change. Per the full note source, this dual approach may increase administrative burdens but could lead to volatility in manufacturing inputs. As seen with the ongoing response from market participants, the narrative around US manufacturing is one of restrained optimism shaped by these regulatory changes. Traders should note that while tariffs may seem excessive, the nuanced exemptions could blunt the immediate impact on certain sectors, providing a mixed signal to FX traders. The alternative read could suggest that if the exemptions do not pacify market concerns about supply chain disruptions, we could witness broader repercussions across related currency pairs.
What the desk is arguing
The desk believes that the recent spikes in import taxes by the US, notably a proposed 100% tariff on microchips, highlight a significant shift in trade policy that complicates the operating environment for manufacturers. After the implementation of these taxes, President Trump's nuanced exemption for certain large exporters suggests a strategy aimed more at managing market perception than creating substantial economic change. Per the full note source, this dual approach may increase administrative burdens but could lead to volatility in manufacturing inputs.
As seen with the ongoing response from market participants, the narrative around US manufacturing is one of restrained optimism shaped by these regulatory changes. Traders should note that while tariffs may seem excessive, the nuanced exemptions could blunt the immediate impact on certain sectors, providing a mixed signal to FX traders.
The alternative read could suggest that if the exemptions do not pacify market concerns about supply chain disruptions, we could witness broader repercussions across related currency pairs.
Where it sits in our coverage
Our current consensus target for USD performance sits at 1.075, with a range between 1.04 and 1.12. Specifically, notable firms have set the following Dec-26 targets: - jpmorgan: 1.10 - bofa: 1.04
This view aligns with jpmorgan, whose target aligns with our consensus, placing us toward the upper end of the range, while bofa presents a more bearish outlook.
How other firms see it
Firms such as jpmorgan maintain a positive outlook, suggesting stability or growth in USD given the overall trade tone. In contrast, bofa takes a contrary stance, anticipating a potential drop in USD value due to ongoing trade policy complexities.
Relevant currency pairs to watch include USD/JPY and EUR/USD, as their trajectories could be influenced by the evolving trade discussions and tariffs affecting US exports and imports overall.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Proposed US tariffs introduce uncertainty for manufacturers.
- 02Exemptions for select exporters may mitigate some tariff impacts.
- 03Volatility could surface in currency pairs related to trade-sensitive sectors.
- 04Traders should monitor administrative burdens tied to new tax regulations.
Market implications
Watch for potential volatility in USD/JPY due to the market's response to these tariffs. Additionally, trader positioning could shift as companies reassess the implications of heightened tax burdens.
Risks to this view
Should the exemptions be expanded or if significant disruptions occur in supply chains stemming from these tariffs, it may force a reassessment of USD strength and potentially lead to a reversal in current positions.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 7th of August. Who would be a US manufacturer at the moment?
US President Trump sort of retreated from threats to tax importers of microchips. The manoeuvre is more a pirouette than a retreat as such. Taxes of about 100% are threatened to be imposed on some imported chips.
But certain companies' products will not be taxed. The paperwork involved in working out what tax importers actually owe promises to be significant. With companies like the very sizeable Taiwan TSMC saying their customers are not due to be taxed, the effectiveness of this particular wave of trade taxes seems to be more about spin and less about substance, hence the pirouetting manoeuvre.
However, this sort of micromanagement of supply chains by government does threaten to add hidden bureaucratic costs to businesses. Meanwhile, US imports of almost any products put on board a ship, plane or truck bound for the States after midnight, will now be subject to a new tax burden. Export data from China for July showed strong and stronger than expected growth.
China's data providers are not politically independent and the lack of political independence in any data provider always raises questions for investors. But the broad headlines of trade data are normally regarded as being amongst the more reliable statistics because of their importance to customs revenues. The strength of exports arose from increased sales to countries other than the United States in July.
Past practice suggests that there will be at least a suspicion that a proportion of those sales will end up in the US anyway with some careful rebranding. China sells the United States more than the United States buys from China going on their respective official trade data and that anomaly is most likely accounted for by rerouting of China's exports. But the situation is a reminder that the rest of the world is carrying on more or less as normal while whatever is happening in the United States plays out in isolation.
German trade data also showed slightly stronger exports than had been anticipated in June. German industrial production data for June was weaker however and very unusually the previous month's data was revised down. The Bank of England meets today and is expected to cut rates by every market economist who has been asked the question.
The consumer price data in the United Kingdom is higher than in Europe but this is largely due to peculiarities in UK energy pricing and administered price and it's not necessarily symptomatic of broad based price increases. Policymakers anywhere need to differentiate between a higher consumer price inflation rate caused by a relative price change reflecting an anomaly in a single industry and a higher consumer price inflation rate that is caused by a general increase in a broad range of prices reflecting a widespread imbalance of supply and demand in the economy. The United States is publishing productivity and unit labour cost data for the second quarter.
As always productivity is the summary statistic for everything economists do not understand and as such it swings around quite a lot. However it's worth noting that the occasional fear that has been voiced about artificial intelligence taking away everyone's jobs is not showing up at all in the productivity data. These numbers would be a lot higher were that actually to be the case.
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.
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