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DISCUSSION POINTS – EURO, AUD / USD, NZD / USD, TRUMPES RATE
- Trump seeks to offer the car rate as part of a protectionist policy
- Proposal Arising from the Announcement of GM's Plan to Reduce Factories and Wages in Canada
- Tariff likely to provoke retaliation – AUD / USD, NZD / USD and Euro could suffer
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AUTOMOBILE RATES LOOM TO THE HORIZON
Sensitivity badets, such as the Australian dollar and the New Zealand dollar, may soon be suffering from fears of a new auto tariff likely to trigger retaliation. President Donald Trump announced Wednesday that he is exploring new auto rates to promote domestic production and protect jobs. This is part of his broader protectionist initiatives which has characterized the economic policies of his administration.
On November 26, GM announced plans to close five plants in North America in 2019 and reduce its workforce. In the United States, the Michigan and Ohio mills will be closed.
Trump cited the 25% rate imposed on light trucks in the 1960s at Chicken war, claiming that it promotes domestic production and job creation. However, once the economic conflict subsided, the US auto industry lobbied Congress for it to maintain the tax in order to protect it from foreign competition. The overall result was a loss of well-being and higher prices for consumers.
See our complete interactive the history of trade wars here
ESCALATION OF THE COMMERCIAL WAR?
After the Trump administration imposed tariffs on aluminum and steel, the EU reacted by imposing duties on major US exports, for example. whiskey, motorcycles and orange juice. This happened at the beginning of the trade war with China. In October 2018, in its report on financial stability, published by the IMF, the Financial Stability Report cited trade wars as a major factor in risk aversion and instability.
Automobile tariffs are likely to further strain relations with China and intensify trade tensions with Japan, a major auto exporter. The EU would almost certainly impose retaliatory tariffs, given that the largest economy in the EU – Germany – is one of the largest auto exporters in the world. Other notable automotive exporters include Belgium, Italy and France.
MOTOR RATES PROBABLE TO CARBURATE AVERAGE WORLD RISK
Throughout 2018, the US-led trade wars were a key factor that put downward pressure on cycle-sensitive badets. The Australian dollar and the New Zealand dollar are steadily declining, with global growth prospects uncertain. This is also happening in the context of a Hawkish Fed that has been a major factor contributing to risk aversion.
If new car rates are imposed, the likelihood of retaliation is quite high. The Australian dollar and New Zealand as well as the euro would probably fall as risk aversion tightened. Emerging markets should also suffer. Assets at risk, such as the yen and the Swiss franc, are likely to outperform their risk-averse counterparts.
Commercial wars weighing on the Australian and the Kiwi
Risk aversion: boosting the Japanese yen and the Swiss franc
TRADING RESOURCES
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
Contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter
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