UBS On-Air: Paul Donovan Daily Audio 'Well….'
The desk interprets the recent commentary from UBS, highlighting the substantial tax increase announced by President Trump and its implications for the US economy. Per the full note from UBS, the administration's approach to tariffs appears arbitrary and may raise questions regarding its competence in handling trade relations. The concerns of a potential US recession loom should these trade taxes become permanent, as investors evaluate the administration's past willingness to retract such measures. Currently, the consensus around currency pairs remains uncertain amid the macroeconomic backdrop, with no high-impact economic events on the immediate horizon.
What the desk is arguing
The desk asserts that the newly announced tax increases by President Trump, as highlighted by UBS, signal a significant shift in US trade policy that could create instability in markets. Trump's formula for determining tariffs, particularly the nearly universal 10% tax on imports, reflects a departure from established economic principles, raising serious concerns about the administration's grasp of global trade complexities.
Further, this policy shift could lead to elevated market risk premiums as investors grapple with potential repercussions. The commentary suggests that a decisive factor will be whether these tariffs persist or are retracted, a point emphasized by UBS's note indicating market belief in a retreat from visible trade taxes.
Where it sits in our coverage
Our coverage indicates a consensus target for the USD/CAD at 1.075, with a range between 1.04 and 1.12. The following firms' targets highlight this consensus: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan, while diverging from bofa, who hold a more bearish outlook at the lower end of the target range.
How other firms see it
Aligned firms agree with the desk's thesis on potential market instability due to policy unpredictability, with jpmorgan and mgm highlighting concerns about growth trajectories. Conversely, bofa presents a contrary view, believing that markets could adapt without significant transition costs.
Market participants should monitor the USD's strength against the CAD closely, particularly as trade policies evolve in response to global economic conditions, including ongoing discussions about potential rate adjustments by the Fed.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's tax increases mark significant interference in US trade policy, potentially impacting market perceptions.
- 02The arbitrary nature of tariffs raises questions about the administration's competence in trade management.
- 03The sustainability of these tariffs will be crucial in determining future US economic growth.
- 04Current market consensus reflects uncertainty with no immediate high-impact events on the calendar.
Market implications
Focus on USD/CAD as traders navigate the instability introduced by the new tariffs, particularly looking at levels around 1.075. Market reactions could be heavily influenced by future trade negotiations or shifts in policy direction from the White House.
Risks to this view
A rapid reversal of the newly imposed tariffs or substantial economic growth indicators could invalidate this bearish outlook. Additionally, any positive signals from trade negotiations or stronger-than-expected economic data may compel traders to reconsider existing positions.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Thursday the 3rd of April. Yesterday's massive tax increase by US President Trump marks a significant interference in the decisions of US consumers. It was perhaps a step along Hayek's road to serfdom.
There are four critical points for investors. One, markets are likely to question the competence of the administration in policy setting. Tariffs were calculated at half the country's trade surplus to the United States divided by their exports to the United States with a minimum threshold of 10%.
That is a predictable formula and completely unrelated to anything to do with trade openness. The Heard and Macdonald Islands, which are uninhabited territory controlled by Australia, were randomly subject to a 10% trade tax. There is no word yet on whether the seal and penguin population intends to retaliate.
Investors are at least likely to question whether these are the actions of an administration that has fully grasped the complexities of modern global trade. Questions of competence must increase the market risk premium around any issue affected by US policy making. Two, the critical question for growth this year is whether these trade taxes last.
Trump has shown a tendency to retreat from trade taxes that are visible with almost indecent haste, and markets are likely to cling to some hope of that retreat being repeated. However, the near universal 10% tax on imports suggests there may be a limit to how far Trump retreats this time. The ending of the de minimis tax exemption on the 2nd of May, if carried through, would be a very visible tax to US consumers.
If there is no retreat from the tariffs overall, markets will price a US recession. If there is a retreat, markets will assume US growth will weaken. The extent to which growth falls will depend on second round effects, how significant the retreat is, and how quickly it comes.
There are exemptions to tariffs. Oil and autos do not get additional tariffs over and above what has already been set. Critically, Canada and Mexico are exempt as long as they follow the rules of the revised NAFTA deal.
That is important because taxing Canadian and Mexican imports would immediately hit food and fuel prices in the United States, creating a very visible inflation shock. There will now be a lot of negotiations for patronage-style deals to get exemptions both by countries and by sectors. The possibility of negotiating tax reductions is included in the tax announcement.
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