UBS On-Air: Paul Donovan Daily Audio 'Welcome back uncertainty'
The desk interprets the recent commentary from UBS, emphasizing that increased trade policy uncertainty poses significant risks to currency valuations. The Supreme Court's ruling against certain IEEPA tariffs, while anticipated, sets a perplexing backdrop with President Trump's more sweeping universal tariffs, rising unexpectedly from 10% to 15%. Per the full note source, the absence of specific details about exemptions or the implications for revised trade agreements adds to the volatility that traders must navigate in the coming sessions.
What the desk is arguing
The desk holds that the ongoing uncertainty surrounding US trade policy will likely lead to increased volatility in the FX markets. UBS highlighted that while some aspects of the recent tariff changes were expected, the sudden rise to a 15% universal tariff unsettles previously held assumptions about trade negotiations and their impact on currency dynamics.
Recent reports suggest that these tariffs could lead to a ripple effect, influencing currency pairs and positioning choices among traders. Industry analysts estimated that this uncertainty could contribute to potential shifts in USD sensitivity towards risk assets.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075, with a range between 1.04 and 1.12. Key firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This viewpoint aligns closely with jpmorgan, which sits near the upper bound of our established range, while bofa presents a more cautious stance, suggesting further depreciation of the USD if uncertainty lingers. The desk's positioning reflects a more bullish outlook compared to the broader consensus.
How other firms see it
Aligning with our view are firms like jpmorgan which recognize the potential for the USD to firm up short-term, whereas bofa takes a contrarian approach, indicating that the ongoing uncertainties may push USD lower.
Traders should monitor the USD/EUR pair closely, as fluctuations in trade policy will directly influence bilateral currency valuations in the context of broader economic indicators from the US and Europe.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Increased trade policy uncertainty is leading to heightened FX market volatility.
- 02The unexpected rise of tariffs to 15% complicates trade negotiations with key partners.
- 03Market positioning may shift significantly as traders respond to evolving trade dynamics.
- 04The USD may see increased strength or weakness based on ongoing tariff developments.
Market implications
Traders should watch for potential shifts in the USD/EUR towards the consensus target of 1.075. Frequent updates on tariff exemptions and their implications will be critical in shaping market sentiment, particularly as economic reports are released in the near term.
Risks to this view
Should news emerge around significant exemptions to the newly imposed tariffs or a surprising resolution to ongoing trade disputes, this could catalyze a reversal of current USD strength and dampen volatility in the FX markets.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 5.30 in the morning London time on Monday the 23rd of February. The US trade position is somewhat confused at the moment.
The Supreme Court shut down US President Trump's IEPA tariff rulings, arguing that these exceeded presidential authority. Trump then declared a 10% universal tariff, and then raised that to 15%, which would stay in place for 150 days before Congress has to vote to continue it. This will put tariffs and the US affordability crisis into the spotlight fairly close to the mid-term elections.
It's not clear how universal the universal tariff might be. Products that were previously exempt from tariff might now be covered, and it's not clear what this means for Mexico and Canada. US administration officials are urging countries to honour their trade deals with the US, but several of these trade deals had already stalled.
The EU is already hinting that their deal should be delayed, and for some countries like the UK, applying a universal 15% tariff would be higher than the deal agreed, although that deal was not properly implemented. Administration officials are also talking of further tariffs targeting specific countries. This situation therefore increases policy uncertainty, at a time when US businesses were perhaps cautiously emerging from the paralysis caused by last year's policy uncertainty.
There are some conclusions that can be drawn, albeit with limited precision. Assuming that they are paid out, rebates will increase the fiscal deficit of the United States. They will also act as a fiscal stimulus in the US.
Rebates can only be paid to the people who paid the tariff as a tax payment to the US government, i.e. US importers. These are disproportionately small and medium-sized businesses.
Will this lead to lower prices for consumers? The rebates are unlikely to be passed on to the US consumer. As ECB President Lagarde was at pains to point out over the weekend, the costs of tariffs were generally passed to US consumers.
Where that has been the case, the relevant price increases are likely to stay, either because the 15% tariff also creates a cost to be passed on to consumers, or because companies rarely reverse a price increase once they have got away with it. Certainly, when selected US tariffs came down last year, they tended not to be matched by US consumer price reductions. There are some business sentiment polls due out on both sides of the Atlantic, the German IFO and the US Dallas Fed manufacturing sentiment poll.
German sentiment has tended to underperform reality, the spin of the news cycle perhaps triumphing over the reality of running a business in Germany today. For all the angst about trade, German exports have actually been remarkably stable overall. The comments section of the Dallas data offers the normal extremes of political partisanship, but it might give some hints as to how prepared firms were to getting to adapt to policy uncertainty before the escalation of the latest policy uncertainty.
US factory orders are also due, not a major market focus perhaps, but interesting to see if the Biden-era factory building boom is now resulting in improved demand. The first 20 days' trade data from Korea showed strength in chip sales, which pushed the headline export numbers up notably. Auto exports were, however, a weaker offset.
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.
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