Triple trade truce unlikely to last, USD may resume the rally

  • Markets are relatively calm as trade wars are moving to the backburner.
  • China tariffs have not been implemented while EU-US and NAFTA talks have seen progress.
  • Nothing is a done until everything is done and things could turn sour again.

Optimism on Brexit negotiations has grabbed the headlines, moving trade concerns away from topping the agenda. The calmer atmosphere has limited the US Dollar's gains and also slowed down the yen. However, on each of the three fronts, things are far from being resolved. 

Any fresh deterioration can dampen the mood once again and send the safe-haven USD and JPY higher.

Let us examine the three trade truces:

1) China: Tariffs did not go away

The US plans to impose new tariffs on $200 billion worth of Chinese imports. The deadline for public comments ended on Thursday. On Friday, President Donald Trump threatened to top it off with duties on additional $267 billion of Chinese products. The Administration has announced levies on a total of $50 billion of goods so far. Quintupling the amount would serve as a substantial escalation in the trade wars.

However, time passed by without an announcement on the implementation of these tariffs. Markets may see Trump as crying wolf and may think he will not make a move due to pressures by various interest groups.

It is hard to believe he will back down so quickly. The mid-term elections are getting closer, and the President wants to fulfill a campaign promise to stir up his base. An announcement on these duties coming into force may occur at any moment and hit markets hard.

2) NAFTA: Canada not about to surrender 

Mexico and the US stuck an accord late in August and Canada was expected to join in quickly. One Friday deadline passed by without a deal, and so did another Friday. After talks broke up and resumed, both sides are expressing optimism about finalizing an agreement. 

Also here, words such as "intense negotiations" and also "making progress" do not mean the US and Canada are nearing an agreement. Canadian Foreign Minister Chrystia Freeland leads the talks on the Canadian side, and she always tries to keep high spirits. However, her omnipresent smiles cannot be understood as an imminent deal.

If the Trump Administration insists on changing Chapter 19 regarding arbitration, Canada could walk away as they did in the original NAFTA negotiations. Canada knows that the US Congress has control over a change in NAFTA and that many Representatives represent constituents who depend on trade with America's Northern neighbor. It is hard to see an imminent compromise in this kind of situation.

3) EU-US talks could just wait

The trans-Atlantic discussions began after EU Commission President Jean-Claude Juncker paid a visit to the White House. Ahead of the talks, Trump said he wants the EU to drop car tariffs. The EU has since agreed to a mutual dropping of duties. However, Trump recently said it may not be enough.

His stance indicates he prefers a trade war over getting the terms he wanted. A trade war is good politics for his base ahead of the elections. 

So, the reports about progress on trade talks may be somewhat premature. Both sides aim to reach a deal in November. This is possible if it comes after Americans go to the polls. Until then, a crisis or a breakup in talks is certainly on the cards.

Conclusion

The recent calm around trade masks high uncertainty on all three fronts. The US could slap tariffs on China at any moment. The negotiations with Canada may not be fruitful and talks with the EU could just simply wait or suffer from an artificially manufactured crisis.

For currency markets, any deterioration or escalation could send the US Dollar and the Japanese higher, exactly in previous events. 

More: Trump tariff plan explained: What are trade wars and how do they affect currencies

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