(Bloomberg) -- U.S. President Donald Trump's decision to slap tariffs on steel and aluminum imports has traders assessing which currencies have the most to lose.
While it's still early, analysts in the $5.1-trillion-a-day foreign-exchange market are watching to see how the U.S.'s trading partners respond, particularly China. The European Union has already said it will react to the tariffs with countermeasures.
“You're going to have protection for the first time in a long time,” the president said Thursday. His latest action escalates the administration's hawkish trade agenda and could hit producers from Europe to Asia and spur global retaliation.
KEY VIEWS:
- Brown Brothers Harriman (Win Thin, interview)
- “It's too early to say what happens, but clearly this is potentially negative for several EM countries,” he says. “Growth, trade and exchange rates could all be hit,” but it's still not clear how other countries will react or retaliate
- Deutsche Bank (Alan Ruskin, interview)
- Markets will keep an eye on China, which “has historically said it will respond with proportionality” on trade matters
- If tariffs are contained to steel and aluminum, “there isn't that much to worry about,” he says. “But this is happening at a moment that there is already increased vulnerability to risky assets, given they are reacting to the potential for the Fed accelerating its policy cycle”
- Risk-off currencies including JPY, CHF and EUR are benefiting most; EM currencies, and those of commodity producers, are vulnerable
- Mizuho (Sireen Harajli, interview)
- “We are likely to see a weaker CNY and a stronger USD as an initial reaction,” she says
- At the same time, “I highly doubt that China's government will just sit and watch should the U.S. go ahead with the tariffs”
- PBOC will probably maintain measures to keep the yuan stable in an effort to open up the nation's capital account and internationalize the RMB
- National Australia Bank Ltd (Gavin Friend, interview)
- “This is a negative for global markets as protectionism and trade tariffs are not good for global growth,” he says. That leaves potential for “declines in global equities and a run back into bond markets for safety”
- Protectionism will weigh on USD, particularly with backdrop of growing deficits
- However, if trade tensions escalate to spur risk-off trading, higher-beta assets such as AUD, EM currencies and equities may slide
- “The dollar won't do well” versus developed-nation currencies in an environment of increased protectionism
- Standard Chartered Bank (Ilya Gofshteyn, interview)
- MXN is the most obvious candidate to underperform
- Forecasts USD/MXN at 19.50 by end of 2Q vs ~18.86 currently
- “We have been openly skeptical of Trump's conciliatory comments regarding Nafta, and on top of that, the presidential elections” in Mexico are looming
- TD Securities (Mark McCormick, note)
- U.S. trade protectionism “should be viewed as a process rather than an event,” he says. “A pickup in trade tensions should weaken the dollar against other reserve currencies like EUR and JPY”
- CAD is a “clear victim” of any U.S. trade spat, and markets will look to price in a risk premium for Nafta talks
- Sees near-term setup for USD/CAD heading back toward 1.2920 from current ~1.2820
To contact the reporters on this story: Lananh Nguyen in New York at lnguyen35@bloomberg.net, Liz Capo McCormick in New York at emccormick7@bloomberg.net.
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum
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- MXN is the most obvious candidate to underperform
