Trum and American flag

US-Korea agreement seen as a turning point; UK Trade Secretary Fox states he will not support extension of Brexit transition period

Mar 30 • Morning Roll Call • 391 Views • No Comments

The US and Korea managed to strike an important agreement this week and many recognize it as the first success of President Trump’s trade strategy and a turning point in general. The agreement is being offered as an innovative and a visionary development. Far from new, the US trade thrust is seen as a return to the policies of the Reagan years before the birth of the World Trade Organization and the binding dispute settlement process. These policies consist of threats of tariffs, pursuit of so-called “voluntary” export restrictions, and the use of quotas. Moreover, the US macroeconomic policies, particularly spending, investment, and savings, warn that whatever improvement that can be managed in the US-Korean trade will be lost in the larger forces that will likely lead to wider trade deficits.

US data shows a trade shortfall of almost $23 bln dollar with South Korea last year. Globally, the US trade deficit was almost $570 bln last year. In 2012, when the US and Korea initially struck the trade agreement, the US trade deficit with Korea was about $16.5 bln, and the overall shortfall was about $536 bln. A 20% reduction in the US bilateral deficit with Korea is tantamount to a rounding error in the international balance. Korea agreed to limit its steel exports to the US to 70% of recent annual averages and in exchange, will not be subject to the tariffs. However, Korean firms are not exempt from the 10% tariff on aluminum. Korea agreed to allow as many as 50k autos per US producer up from 25k now, which they do not even come close to meeting. And those auto imports are exempt from meeting local safety standards, recognizing US standards. Korea has also agreed to eliminate some non-tariff barriers, like environmental testing. Korea also conceded that the 25% tariff on Korea-made pick-up trucks can be extended from 2021 to 2041. A key issue is whether the US success with Korea can be duplicated. Given the security needs, and the critical time for North-South relations, the US had leverage over Korea that might not be able to be repeated, especially with China. The tactics may not work as well on Europe either, even if there is an implicit threat about NATO. For more than 20 years, American policymakers chose the multilateral route and the binding conflict resolution mechanism to the cruder threats.

Speaking to the BBC Radio 4 yesterday, the UK Trade Secretary Liam Fox, said that he does not think transition period will extend beyond the end of 2020. The added that he believes the UK can get a deal that is acceptable to parliament and that there is a need to maintain confidence in Brexit talks. In addition, yesterday we had importance news release from the UK, where Q4 final GDP met estimates, while Current account deficit has unexpectedly shrunk. The UK GDP third estimate showed that the GDP figures came in at 0.4% q/q in the fourth quarter of 2017, same as that seen in the precious readout. While on an annualized basis, the UK economy’s growth rate arrived at 1.4% in Q4, meting the consensus forecasts of 1.4% and 1.4% flash reading. Separately, the UK Q4 current deficit unexpectedly narrowed by GBP -18.44 billion vs. a decrease of GBR -24.00 billion expected and GBP -19.17 billion (revised up from GBP 22.78 billion) last. On this news, the British Pound gained some traction, lifting the GBP/USD pair up back above mid -1.4000s.
Furthermore, the macroeconomic news that came from the US yesterday, personal income increased $67.3 billion (0.4%) in February, disposable income (DPI) increased %53.9 billion (0.4%) and personal expenditures (PCE) increased $27.7 billion (0.2).

Friday is not going to provide any high impact news, where most of the concentration is on the EU. Traders may want to keep an eye on the French rate – seen lifting to 1.5% y/y from 1.3% y/y and the Italian rate to 0.8% y/y from 0.5%. This should leave the preliminary March Eurozone rate, due April 4, to come back to around 1.4/1.5%. This is still far below the ECB’s upper limit for price stability of 2%, but officials are more confident now that underlying inflation has turned a corner and is on the way higher. -FXStreet

 

EUR/USD

The EUR/USD is lifting ahead of the European markets, continuing the bounce seen in the previous New York session after hitting a low of 1.2284, and the pair is now testing around the 1.2315 region. – FXStreet
GBP/USD

The GBP/USD pair fell for the third straight day yesterday as the dismal UK Q4 GDP release weighed over the British Pound. The economy expanded by 1.8 percent between 2016 and 2017, slightly less than the 1.9 percent seen between 2015 and 2016. The 1.3980 region is a major static support, as the pair has there multiple intraday highs and lows, which means that a break below it most likely discourage bulls and open doors for further slides.- FXStreet
USD/JPY

The Yen picked up a bid in Asia, pushing the USD/JPY below the 4-hour 200-MA (moving average) and to a session low of 106.14. The pair is all set to end the first quarter down, at least 5 percent. That said, much of the bad news has been priced-in, so the spot could regain some poise in the next quarter. – FXStreet
Gold

Gold held with modest weakness through the early NA session on Thursday and is currently placed near week lows, around the $1322 region. – FXStreet

 

ECONOMIC CALENDAR EVENTS FOR March 30th

EUR French Consumer Spending m/m
EUR French Preliminary CPI m/m
EUR Italian Preliminary CPI m/m

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