Less than 24 hours hours after the People’s Bank of China hinted it may change the components of its USD/CNY basket, global currency and bond markets were shaken by Bloomberg reports that it is considering scaling down its purchases of US treasury bonds. This was in light of surging trade tensions with US. Less than 12 hours later, Canadian officials signalled that president Trump could announce the US withdrawal from the North American Trade Agreement. Today, Beijing dismissed the Bloomberg report as “fake news”.
Is this a way to begin the year? Will 2018 be the year of trade tensions and international economic conflicts? The following two facts could make these two threats possible:
1) Trump’s desire to re-write Obama’s policies is finally spilling over into breaking away from trade deals.
2) Picking a fight with Trump is seemingly a popular political move.
In 2017, Trump’s Border Adjustment Tax proposal aimed at boosting US domestic industry and jobs, was swiftly destroyed by rumblings from US importers. One year later, Trump is set in pursuing his aspirations of boosting local production by striking directly at the US trading partners.
The Canada Question
There was preliminary progress made in the NAFTA negotiations until Mexico and Canada laid out some red lines that the US doesn’t want to accept. The White House denied it but, the damage to the Canadian dollar and Mexican pesos was instantaneous during the late Wednesday trading session. Interestingly, Canada launched a broad complaint of anti-dumping against the US, which is not just on behalf of Canada but representing international trade rules, backed by the World Trade Organisation. This looks more like a global coordinated effort, rather than an attack only from Canada.
No Smoke without Fire
Despite Beijng’s denial of the US bonds purchase rumours, it may not be coincidental that the story emerged at the same time as the US preparing to target China with special tariffs. It’s not the first time and will not be the last when we hear confirmed or unconfirmed reports about scaling down US treasuries from China, or even Saudi Arabia.
NAFTA negotiations are set to resume their next round in Montreal following Trump’s latest threats to end an agreement, which covers more than a quarter of the global economy.
If trump decides to push forward on his NAFTA and China trade tensions, then optimism about a synchronised 2018 could quickly reverse. The result would dampen the rising tide in bond yields and further boost the Japanese yen. As for NAFTA, the process of withdrawing will need to pass through a messy series of votes in Congress. That means more noise and volatility surrounding the Canadian dollar, clouding the nation’s accelerating fundamentals and the Bank of Canada’s path to policy normalisation.