US: Economy stuck between trade and protectionism - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that April should bring further clarity about how far Trump is likely to push his protectionist view give his scheduled meeting with Chinese President Xi in Florida next week and given the dialogue scheduled between Vice-President Pence and Deputy PM Aso in Tokyo on April 18.  

Key Quotes

“There are many reasons why China has been acting to oppose the market forces that have been pressuring its currency.  The potential impact on Chinese companies that have issued USD denominated debt, fears about rising import prices and international reputation may provide some explanation.  If China were to step back from its efforts to prevent the CNY from softening, the resultant surge in the USD/CNY would clearly aggravate the US President.”

“Several press reports suggest that recent meetings between US and China officials, such as the recent trip by US Secretary of State Tillerson to Bejing, have been aimed at mending ties between the two nations after Trump’s pugnacious approach to trade during his election campaign.  Indications from Japan that it will be prepared to increase its shale gas imports from the US and invest in technologies such as high speed rail in the US also suggest that compromises can be made that avoid trade and currency wars.”

“Any sign of a less confrontational approach by the US administration towards China and Japan, is likely to counter fears of protectionism and support investors’ risk appetite.  By contrast an aggressive position by the US on trade could dampen expectations for world growth and increase demand for safe haven currencies such as the JPY.  Any indication that the President may be erring towards the implementation of a border tax suggests that the USD could be facing a significant appreciation potentially in the order of 10% to 15%.”

“The complexity of a border tax combined with the likelihood that it would bring a sharp USD appreciation are two good reasons why we do not anticipate that the US administration will see this as a means to address the US trade deficit.  However, it is a risk to our view.  Currently we expect the USD to edge down to EUR/USD 1.10 and USD/JPY110 by year end as hopes for reflation deflate.”