Are US tariffs effective?By Vincent-Frédéric Mivelaz
As the USA and China continue to implement punitive duties, trade surplus records are occurring. China’s June surplus is estimated at USD 41.61 billion, its highest rate since the beginning of 2018, with exports slightly higher (+3.10%) and imports substantially lower (+6%; prior: +15.60%) than in May. The surplus with the US widened to USD 28.97 billion, its highest since 1999 periods. Chinese exports are mostly to Asia (about 46% in 2017), while the US accounts for 29% of total exports.
So, Chinese economic growth will not be primarily borne by exports but by domestic demand. Credit risk from households and non-financial firms remains large and the government recently implemented stricter regulations: these will drag private consumption and so Chinese growth. The People’s Bank of China is most probably planning to keep money loose for now, thus depreciating the yuan. USD/CNY trades at 6.6856 (year-to-date: +3%), its August 2017 level, and is headed to 6.70 in the short-term. Our year-end target for the pair is 6.80.
USD revives on easing tensionBy Arnaud Masset
King dollar returned on Friday, after the US and China signalled intentions to negotiate. The New Zealand dollar performed worst among the G10 complex as it fell 0.60% to $0.6740. The drop of June Manufacturing PMI – down to 52.8 from 54.4 in May - could also explain the depreciation of the Kiwi. Safe haven currencies resisted quite well to the sudden improvement in risk sentiment. The Swissie edged down only 0.10%, with USD/CHF testing its previous high of 15 May at 1.0042, while the Japanese yen gave up 0.20% as USD/JPY rose to 112.78.
June inflation in the US provided a limited boost to the greenback. Investors remain nervous about a trade war’s effect on inflation. Tariffs would be a double whammy, adding to inflation in the medium to long-term, while stunting growth. This would force the US Federal Reserve Bank to hike rates less aggressively – if not even pause for some time.