USD: Trump opens new front in trade war
The Trump administration's threat to impose tariffs on Mexico will have less of a global spillover than the US-China dispute. But it's still negative for risk sentiment
USD: Another step in escalation of trade wars
In another escalation of the trade war, President Trump announced his intention to impose tariffs on Mexican goods, starting at 5% on 10 June and progressively increasing to 25% by October if the Mexican government does not tackle the immigration issue. This comes in the midst of increased tensions in the US-China trade dispute whereby China is considering an export ban on rare earth elements to the US. While the tariffs on Mexico are likely to have less of a global spillover (in comparison to the US-China trade dispute), it is nonetheless a negative for risk sentiment as it shows that the US administration is not afraid of a multi-front trade war. This in turn keeps the threat of auto tariffs on eurozone car exports very much alive. In terms of implications for Mexico, it is not only negative for the currency (with USD/MXN breaking above 19.60). As the peso comes under pressure, the case for a more frontloaded rate-cutting cycle by Banxico should diminish, given the bank’s sensitivity to FX fluctuations. In turn, the market is likely to price in a delayed and more protracted easing cycle. This suggests that front-end TIIE rates should move higher today.
EUR: The ongoing lack of good news for the euro
In Germany, our economists look for a drop in headline CPI to 1.7% year-on-year, mainly driven by the normalisation in core inflation, where we should see a reversal of the re-occurring Easter effect. Lower CPI in Germany would point to lower inflation in the eurozone in May, which is unlikely to bode well for the euro. Italian Deputy Prime Minister Matteo Salvini’s threat that he is prepared to end the coalition government unless his coalition partner supports his tax plan is also a negative for the EUR.
NOK: Solid employment data to support the case for a hike
The Norwegian May unemployment rate is set to grind lower, reflecting the solid state of the economy. Coupled with high CPI, Norges Bank's forward guidance for a hike in 2H19 remains credible and the central bank is set to be the only one in the G10 FX space with a strong case to raise rates this year. While the krone remains more influenced by the challenging global environment (negative for NOK today), the NB’s hawkish stance should lead to NOK outperformance vs Swedish krona.
CAD: slowing 1Q growth unlikely to weigh on loonie
The upbeat tone from the Bank of Canada on Wednesday left little mark on the FX markets, so investors are likely awaiting today’s 1Q GDP data to consolidate their views on teh Canadian dollar. Economic growth is expected to have slowed in 1Q, but we look for an above-consensus quarter-on-quarter annualised print at 1.1%. While this should, in theory, be broadly supportive for CAD on the day, the escalating trade wars (i.e. Mexico) won’t bode well CAD, one of the key G10 underperformers overnight.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).