US higher tariff rate on Chinese goods takes effect

Summary:

• As of midnight Wasington time the United States hiked a tariff rate on $200 billion of Chinese goods
• Little progress has been made so far in the ongoing trade negotiations in Washington
• Chinese equities recover, Turkish lira rises and falls again overnight

US hikes tariffs on Chinese goods

In line with the previous announcement made by US President Donald Trump last Sunday, the United States lifted a tariff rate on $200 billion of Chinese goods to 25% from 10% as of midnight Washington time. The move was implemented at a time of the ongoing trade discussions between the Chinese envoy PM Liu He, US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin. So far no material progress has been made, the people familiar with the negotiations say. The talks are expected to resume on Friday with the hope that some agreement may be reached. From an economic point of view let us recall that the rise in tariffs implemented overnight will not apply to goods being already in transit, hence a full-blown effect to take place in a few weeks. It means that both sides may have a bit more time to keep negotiating and possibly to reverse today’s move from the US administration.

In response to the increase in duties China said immediately that it would retaliate, however, nothing has been announced yet. After today’s increase in tariffs, the US has already implemented a 25% tariff rate to $250 billion of goods flowing from the world’s second largest economy. Furthermore, Donald Trump has already suggested that the country will go ahead with preparations to impose the same tariff rate on the remaining $325 billion of goods. If such a decision is made, actually all imported goods to the US from China would be taxed. Let us also remind that consumer goods such as electronic equipment, toys, footwear or clothing have been so far only marginally affected by tariffs, therefore if the US goes ahead with the idea to apply a 25% rate to all goods imported from China, it would be a serious blow for consumers. From a macroeconomic standpoint it would also mean higher pressure on prices in the US. This in conjunction with the slowing rate of economic growth would not be a welcome mixture for the Federal Reserve. Despite the higher tariffs announcement as well as revelations that little progress has been made thus far, Asian equity markets have performed quite well. The Shanghai Composite is trading 1.6% higher, the Hang Seng (CHNComp) is rising 0.8% while the Korean KOSPI is treading water.

Wall Street finished yesterday’s session slightly lower. The NASDAQ (US100) fell 0.4% and it is on track to experience its first weekly loss since the beginning of March. The first notable support may be found in the vicinity of 7285 points. Source: xStation5

Turkish lira stands out amid calm FX trading

Asian trading in the currency market did not bring any interesting movements except what we saw in the Turkish lira. The USDTRY dipped suddenly toward 6.06 which could have been triggered by stop loss orders activation placed around 6.15, as Asia-based traders say, cited by Bloomberg. Other Asian traders, also cited by Bloomberg, say that USDTRY losses were triggered by Turkish banks entering the market via interbank platforms at a time when liquidity conditions are poor. After the notable decline we saw a jump back toward 6.15. Keep in mind that the Turkish central bank decided on Thursday to suspend one-week repo funding for commercial banks forcing them to switch to borrow money at a higher rate (a so-called backdoor rate increase). Technically the pair is falling again at the time of writing with the blue line (seen at the bottom of the chart below) acting as the nearest support for buyers (it is the lower bound of the wider bullish channel).

The USDTRY is falling again this morning after seeing hectic trading overnight. Source: xStation5

In the other news:

• The US said it would examine more countries for currency manipulation

• Japanese household spending for March rose 2.1% YoY, beating the median estimate of a 1.6% YoY rise; real cash earnings for March declined 2.5% YoY, falling short of the estimate of a 1.1% YoY fall

• RBA downgraded economic growth and inflation outlook in its Statement on Monetary Policy released overnight