Talking Points:
- Commodity currencies have gained recently at the US Dollar’s expense
- However, looming US tariff action on industrial metals -notably steel- could cast a cloud
- The higher and broader the tariffs, the darker that cloud is likely to be
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Commodity-linked currencies such as the Australian and New Zealand Dollars have joined fully in the current bout of US Dollar weakness but may lose some pep if global trade protectionism comes once more to the fore.
And it might. The US Commerce Department laid out last Friday a range of tariff options for President Trump to consider on imports of steel and aluminum. They reportedly range from a blanket increase in levies on all imports to more targeted measures against certain countries.
China has already called current US protection of its domestic iron and steel markets excessive and reserved the right to retaliate should Washington up the ante here. Japanese steelmakers have also expressed their concerns although their Indian colleagues seem more sanguine.
On the campaign trail Trump was vocal in his desire to protect American jobs from what he claimed to see as unfair foreign competition. He laid down an early marker with his withdrawal of the US from the Trans Pacific Partnership. However, since then the Administration has barked far more than it has bitten on the subject, even in the case of massive Chinese steel production overcapacity which is often ‘dumped’ on world markets.
Now it seems that things are about to change and that some form of steel and aluminum tariff will be imposed.
Obviously investors will have to wait on the details but it seems likely that even an incrementally more protectionist US will be seen as bad news for ‘risk assets’ – those seen as most closely correlated to the global growth cycle. Harsher and more wide ranging tariffs could see significant currency moves.
That could mean headwinds for commodity units, of course with the Canadian Dollar probably joining its Australian and New Zealand cousins under pressure. There could be a retreat from equity too, and a bid for perceived havens such as the Japanese Yen and, perhaps paradoxically, the US Dollar. The Euro is likely to slide too as a more protectionist world would be seen as a clear threat to Europe’s economic recovery even if the single-currency area provides a degree of insulation to members of its own internal market.
Of course increased US tariffs need not lead to a ‘trade war’ with anyone. But they do have the potential to engender countless headlines on that subject and that will not make the environment any more comfortable for growth-linked assets.
--- Written by David Cottle, DailyFX Research
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