The global FX implications are a bit ambiguous.
That’s from the concluding paragraph of a new Goldman note that seeks to flesh out what the currency ramifications might be if a tenuous trade deal between the US and China leads to the latter purchasing more US goods in an effort to reduce the bilateral deficit which, you’re reminded, only matters in the minds of Donald Trump and Peter Navarro.
While US officials are pressing China on a number of key structural issues tied to intellectual property theft, forced technology transfer and the subsidizing of SOEs, Trump has gone to great lengths to suggest that the deficit is indicative of the US “losing” on trade. That line plays well at rallies and it’s also quantifiable, which means he can give his base a big number to latch onto and parrot even if they have no conception whatsoever of what it actually means.
Deputy-level trade discussions with China will commence in Washington on Wednesday, with principal-level meetings between Lighthizer, Mnuchin and Chinese Vice Premier Liu He resuming on Thursday following last week’s pow wow in Beijing.
Wilbur Ross, Larry Kudlow and, unfortunately, Peter Navarro will also be in attendance this week, with the latter always keen on pushing the most aggressive agenda possible.
The base case continues to be that the March deadline beyond which tariffs on $200 billion in Chinese goods are set to more than double will ultimately be extended, with a possible interim agreement that settles some of the less contentious issues serving as a Band-Aid until a more comprehensive deal can be reached over the summer.
As noted last week, Goldman’s baseline scenario calls for a “pause”, where that entails “immediate and concrete deliverables in easier-to-achieve areas, such as a Chinese commitment to increase purchases of US exports over the next several years, commitments on opening access to the Chinese market in certain sectors where foreign ownership is restricted, and tariff reductions”.
Assuming China does go ahead with purchases of more US goods in an effort to give Trump something to shout about at campaign rallies, Goldman reckons that might weigh on the euro.
“On our measurement, European economies such as France, Germany and the UK export a similar basket of goods to the US’ export basket and, therefore, could be the biggest losers from a geographical shift in China import demand”, the bank writes, in a note dated Tuesday.
Essentially, the bank uses an index to measure export similarity where a value of 1 means countries “are in direct competition” while a value of 0 means the basket of exports is completely different.
The chart below shows that “advanced European economies represent the US’ biggest export competitors” and that, Goldman goes on to say, means that “if a trade agreement included a commitment to increase purchases of a broad set of goods from the US, China would most likely substitute its imports from France, Germany, and the UK before other economies.”
If, however, China focuses narrowly on soybeans, semis and other specific products, obviously the countries that export those products have the most to lose (e.g., Brazil, South Korea and Taiwan).
And while, as noted here at the outset, the currency ramifications of a deal with China are just as “ambiguous” as the negotiations themselves, the read-through from Goldman’s Tuesday note is as follows (truncated):
Large-scale purchases of US products would be supportive of the Dollar, particularly against those currencies with competitive exports. Therefore, this analysis suggests BRL, KRW, and TWD could all see a new bout of downside pressure versus USD if China were to shift its current demand for soybeans and semiconductors from those economies to the US… If a trade deal instead includes a commitment to broad purchases of US exports rather than specific products, our results imply greater downside risk to EUR.
That’s pretty self-evident, but I suppose it’s worth mentioning.