Gary Cohn to quit increases the possibility that the tariffs by Trump will be passed. Short USD/JPY?
Last week, President Trump announced that United States will institute tariffs on steel and aluminum as early as this week. This sparked a sell-down in the stock market whereby Dow fell 3% and S&P 500 fell 2%. It might be possible that the threat of a potential trade war might overshadow US NFP for this week.
- Even though the failure of stopping tariffs by Trump might not be the sole reason for Cohn’s resignation, his departure could mean that the Trump tariffs will be soon be a reality.
- European Union has plans to respond by imposing tariffs on bourbon, Harleys and Levi jeans if the tariffs trade law were to be passed.
- The main target for the tariffs was China as China makes large amount of steel and aluminum, flooding the market with cheap products. This hurt American steel & aluminum producers. However, China only send a small percentage of its output to US.
- South Korea has hit back rapidly at US tariffs on washing machines and solar panels, filing challenges and demands for compensation at the World Trade Organisation.
- Canada, which buy more than half of American steel, vows to retaliate if they are not exempted. Trump tweeted that tariffs on steel and aluminum will only come off if new and fair NAFTA agreement is signed.
There are few winners in a full-blown trade war which can be seen during the 1930s trade war that enveloped the economy. If the tariffs law were to be passed, the economy run the risk of sparking a cycle of retaliation which eventually could lead to a global recession.
For FX traders, the intensification of trade conflicts could mean funds are flowing into safe havens until the tariffs issues are confirmed. Furthermore, the dollar will faced further downside as fears over trade war continues.
With US facing full employment at this moment , tariffs will only result in higher inflation than higher output if basic economics theory works. Hence this will lead to a more hawkish Fed moving forward.
Fullerton Markets Research Team
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