Fears that the UK could leave the EU in a little over six months without an agreement continues to drag sterling lower. Recall that over the weekend, the UK’s International Trade Minister Fox suggested there was a 60% chance of a no-deal Brexit. A few days earlier BOE Carney said that although it was not the most likely scenario, the risks such a departure were “higher than comfort.” Sterling is lower for a fifth session and is testing the $1.29 area, which corresponds to a 61.8% retracement of sterling’s rally since January 2017 and ignoring the flash crash low from the previous October. The next technical target would be in the $1.2775-$1.2800 area.
Sterling is also slumping against the euro, which itself has been able to maintain a toehold above $1.16. Still, the single currency is at its best level against sterling (~GBP0.8980) since last November. It has closed only once above GBP0.9000 since last September, despite several intra-day violations.
Sterling is stealing part of the spotlight that is on the Asia-Pacific today. Early in the session, the USD announced that the 25% tariff on $16 bln of Chinese goods, as the second part of the $50 bln targeted goods in retaliation for the intellectual property rights violations, as of August 23. The goods are largely plastics, electronics, and chemicals, but also include motorcycles and railway cars.
Last week, China identified $60 bln of US goods it would slap with a range of tariffs in retaliation if the US goes forward with the threat of the second round of tariffs on $200 bln of Chinese goods. This threat by the US was in response to China’s retaliatory tariffs for initial action on intellectual property rights. The Trump Administration’s actions against China appears to enjoy widespread domestic support. Our concern is about the effectiveness. We are skeptical that it will change China’s behavior or reduce the US trade deficit. In fact, in the first six months of the year, the US trade deficit grew by a little more than 7%, while China’s trade surplus fell by almost 25%.
