White House reported yesterday that the government would be taking a page from the Great Depression’s book, when the state directly provided monetary relief to the most affected sectors of the economy. We are talking about the farming sector which suffers from the decline of export orders as a result of the deepening rift between the US and China and the EU.
The “rescue package” of politically sensitive sectors, particularly agriculture, suggests that Trump is far from rolling back tariffs and removing threats of introducing new tariffs from the agenda. However, the reciprocal tariffs of China and the EU were aimed at reducing purchases of soybeans, the main article of US farm exports, which led to a glut of the domestic market and a fall in product prices.
In 2017, the United States exported agricultural products worth $138 billion, of which $ 21.5 billion accounted for soybeans. Half of all exports were to China.
The amount of compensation will be about 12 billion dollars and is expected to allow the farmer to pay off their short-term debts, as well as purchase the necessary equipment. But the measure in any case is aimed at solving the pressing problems in the sector, while a decrease in the public outcry will allow Trump to continue to shake the basis for reciprocal trade with China.
In an interview with CNBC on Friday, Trump said he that is ready to go for tariffs for $500B goods thus sending China a signal of imminent escalation to the highest level while trying to probe the reaction of the Chinese authorities. However, they have not responded yet to the comment in any way.
Today, Trump meets with European Commission President Juncker to discuss trade issues. However, Trump’s tweet sharply put an end to the rumors of potential agreements, in which he said that the US is ready for tariff-free trade with EU, while the latter is not.
The representative of the European Commission said that Juncker does not have anything to offer to the United States. Trade adviser Larry Kudlow expected in turn that a high-ranking EU official will arrive with “significant” trade offers.
The downside risks in USDJPY have now added to the escalation of trade wars, in particular, to the reaction of China. They’ve been mulling over the response longer than usual, while unexpected outcome of the meeting between Trump and the EU representative can result in tougher stance in trade with the EU. The Bank of Japan offered to buy an unlimited number of bonds from the market at a fixed yield to maturity of 0.11% which assures that the regulator is not yet ready to refrain from ZIRP on government bonds. The yield rally run out of steam at the level 0.09% on 10-yr JGB yesterday and by today has fallen to 0.07%. USDJPY is moving sideways today in the range of 111 – 111.30 testing often the lower bound of the band.
The currency market is calm, but AUDUSD was defeated by weak inflation data for the second quarter. The key indicator was 2.1%, lagging behind the forecast by 0.1%. Bullish tweaks in RBA guidance look quite slim in perspective considering inflation slack. Regulatory may be forced to stick to a soft policy longer than expected, which was taken into account in the market by increasing sales of AUD.
The ECB is expected to stand pat on key monetary tools, leaving deposit rate and interest rate unchanged. The watchdog is deeply concerned about the business climate, where tariff wars have significantly dampened business outlook. Steady decline in IFO leading gauges point to a low investment activity. Today there is another portion of this data and the euro will definitely pay attention to them on the eve of the regulator’s meeting. However, in general, the meeting on Thursday is unlikely to bring clarity about the ECB plans to raise rates next year. While expectations are formed for September – November 2019. In conditions of low activity in the manufacturing sector, low consumer confidence and the threat of destabilization in foreign trade, the ECB is unlikely to take a tone above neutral. Outlook for Euro for tomorrow is neutral.
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