Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

Over the weekend, President Donald Trump enacted significant tariffs, imposing a 25% levy on imports from Canada (except energy 10%) and Mexico, and an additional 10% on goods from China. These measures, justified by the administration as necessary to address issues like fentanyl trafficking and undocumented migration, have sparked widespread concern among economists and policymakers. The immediate effects are evident in global currency markets, with notable depreciations observed in several currencies, including the Australian dollar, which has hit a four-year low against the U.S. dollar. ABSI this week investigates the Trump tariffs and their effects on markets, most notably currency markets. 

The imposition of tariffs has had a material effect on financial markets but none so more than led currency markets. The Australian dollar, for instance, has declined ~1.5 cents to under US$0.61, reaching a four-year low against the greenback. This depreciation is attributed to concerns over reduced global economic growth, particularly a potential decrease in Chinese demand for Australian commodities such as iron ore. This is playing out on the ASX with the market deep in the red, particularly mining stocks. Similarly, the Canadian dollar and other currencies have experienced downward pressure.

Source: Google

This reaction in currency markets follows logic as an automatic balancing mechanism for trade between the countries. A weaker Canadian dollar makes Canadian exports cheaper for U.S. consumers, which can help offset the increased costs imposed by the new tariffs. Noteworthy though is that China's currency, the yuan, operates under a managed float system, where the People's Bank of China (PBOC) maintains tight control over its value. This system limits the yuan's ability to depreciate in response to market forces. To counteract the effects of U.S. tariffs, Chinese authorities may need to adjust the yuan's reference rate or implement other monetary policy tools to maintain export competitiveness.

The tariffs are expected to have far-reaching implications for the economies involved. In the US, consumers may face higher prices on imported goods, leading to increased inflationary pressures. Industries reliant on imported components, such as automotive and electronics manufacturing, could see rising production costs, potentially resulting in higher prices for consumers. Furthermore, ~62% of US oil imports are from Canada, even though the tariff was limited to 10% it will still mean high fuel prices for the US which should flow through all facets of the economy.

Canadian Exports & Trading Partners 2022

Source: OEC

Canada and Mexico, as major trading partners of the US, are likely to experience economic strain due to reduced export competitiveness. However, the depreciation of their currencies may provide some relief. I expect some Chinese government intervention post the lunar new year celebratory period. 

In Australia, while not directly targeted by the tariffs, the economy remains vulnerable due to its close economic ties with China. A slowdown in Chinese demand for commodities could adversely affect Australian exporters, leading to broader economic challenges.

The introduction of Trump tariffs has heightened concerns about a potential new global trade war, in particular with China. While Trump has laid out conditions for tariff removal, he has also included retaliatory clauses. Therefore, retaliatory measures from Canada, Mexico, and China could further disrupt international trade flows, leading to increased market volatility and uncertainty. Economists warn that such actions could slow global economic growth and contribute to higher inflation rates worldwide. I am sure the RBA will be watching this space closely.

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