Deals, deals and nearly deals
Risk assets have received a boost as trade deals cross or approach the finish line ahead of next week’s August 1st deadline. First in yesterday’s session was the announcement of a deal between Japan and the US. This deal had proved elusive for a while and news of its completion sent equity prices higher globally. A stronger risk sentiment spilled over into FX also, but its impact was hard to see within the Yen. Due to domestic challenges creating fiscal and political concerns, USDJPY and Japanese debt still declined intraday.
Details of the deal will continue to emerge, however, boil down to a reciprocal 15% tariff on goods with the exception of steel and aluminium which remain at 50%. The reciprocal tariff as POTUS has been swift to boast, includes industries such as the automotive and agriculture sectors which have been off limits to some US businesses and consumers for some time. A small sweetener for the US is the creation of an investment fund and bilateral infrastructure ventures. It’s hardly revolutionary but the confirmation of a deal does confirm markets’ bias towards a permanent de-escalation in Trump’s trade war. Not too long after a deal with Japan was announced and it was the Euro’s turn to begin to get jittery over a potential trade deal with the EU.
Rumours abounded during yesterday’s European afternoon session and began to kickstart the Euro into life. Volatility ticked higher as expectations of an imminent deal grew. Overall, this has left the Euro stronger against the Dollar, pushing back to recent year-to-date highs. Before April 2nd, Trump’s so-called liberation day, EU exports to the US were subject to an average of 4.8% tariff borne by US importers. Aside from some fleeting threats, since this date, to allow for negations to progress, a 10% supplementary tariff has been applied. The deal in speculation serves to provide a universal reciprocal tariff of 15% and therefore merely cements the latest status quo. The deal leaves scope for some key industries to be mutually carved out of the universal tariff. A relatively weak but necessary deal explains EURUSD’s modest but positive reaction.
Discussion and Analysis by Charles Porter
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