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Australian Dollar Shrugs Off White House's Steel Industry Trade Bombs

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“A tariff war may generate a few jobs in the US steel sector, but there will be more losers as the cost of manufacturing rises and trade frictions deepen...If the US strategy going forward is to engage China in a wider array of products, retaliation will be all but inevitable.”

The Australian Dollar was treading water during early trading in London Friday, with fractional gains over all its developed world rivals barring the Kiwi Dollar, as markets shrugged off a White House decision to impose tariffs on imported aluminium and steel.

President Donald Trump announced late Thursday that America will levy tariffs of 10% and 25% respectively on all imports of aluminium and steel into the states, with the exception of those that come from Canada and Mexico, under section 232 of the Trade Expansion Act of 1962.

Countries will have the opportunity to apply for exemption and so too will American users of steel and aluminium products in the states, where they are unable to find a suitable alternative product that is made in America.

“Unfair trade practices and industrial policies of other countries have harmed our steel and aluminum industries, posing a threat to our national security,” the White House says in a statement.

“The decline of American steel and aluminum production has resulted in extensive job losses for hardworking Americans in industries critical to our national security and economic well-being. The President has long made clear that he will stand up against unfair trade practices and is following through to address the threat they pose to our national security.”

The AUD/USD was quoted 0.08% higher at 0.7798 early on Friday after having held steady overnight while the Pound-to-Aussie rate was up 0.01% at 1.7718.

Metals tariffs are important for Australia given that its largest export is iron ore, a key component of steel, and that most of it goes to the world’s largest steel producer; China. Anything that further dampens international demand for steel and, thereby, iron ore would be bad for Australia. Luckily, some see the tariffs making little difference.

“US tariffs likely won’t change the global supply-demand dynamic for steel; it is also unlikely that producers in Japan, South Korea, and Taiwan will have to divert their steel exports elsewhere, creating a global supply glut outside of the US. China’s goal to reduce steel output will be a far more dominant factor in driving steel supply and prices in the coming years,” says Taimur Baig, chief economist at DBS Bank in Singapore.

Separately to the section 232 measures, the United States imposed a new 13.79% tariff on the the importation of forged steel fittings from China, citing unfair competition due to state subsidies for producers.

This probably has few implications for the global market, given American imports of Chinese forged steel fittings were just $79 million last year, but is hardly positive news for China and Australia.

“Since China is the dominant supplier of steel worldwide, what happens to US domestic steel prices will hardly matter for global prices. Since China barely exports 1% of its total production to the US, the real impact will be on sentiment, as this may well be the beginning of a much broader set of import restriction measures,” says Baig.

The tariffs come at the tailend of a week long period where Washington’s rhetoric on international trade has hardened, particularly around metals and the North American Free Trade Agreement.

Foreign bodies such as the European Union have threatened retaliatory measures if they are targeted with any new tariffs, prompting concerns over a possible trade war. The European automotive sector will be among the first victims of the White House tariffs.

This may explain why the EUR/USD rate fell steeply during late noon trading and overnight on Thursday, dropping from 1.2420 Thursday afternoon to 1.2316 early on Friday.

European carmakers have spent billions of Dollars building supply chains in Mexico to support sales into the United States during recent years. America’s tariff rate on European car imports is just 2.5% where the European Union external tariff is 10%.

“A tariff war may generate a few jobs in the US steel sector, but there will be more losers as the cost of manufacturing rises and trade frictions deepen. To us, the key worry is what comes next. If the US strategy going forward is to engage China in a wider array of products, retaliation will be all but inevitable,” says Baig.

“This will not only hurt trade, but affect investment sentiment and company performance. In the end, this will be a lose-lose proposition, in our view.”

Reserve Bank of Australia governor Philip Lowe spoke out against the plan in a speech to the Australian Business Review summit in Sydney on Wednesday, saying the tariffs are "highly regrettable and bad policy.”

For its part, Washington says the tariff move is intended to protect American steel producers, and jobs, from dumping by state-subsidised foreign producers although it is thought they will be applied to imports across the board, from all countries.

Concerns over an increasingly belligerent Washington escalated Wednesday when National Economic Council director Gary Cohn, the former president of Goldman Sachs, resigned from his role in the administration.

Cohn's resignation followed widespread reports that Cohn was attempting to persuade the White House to ditch the tariff idea, or at least reduce the rates. 

Already, prices of iron ore futures traded on China’s Dalian Commodity Exchange have fallen by nearly 10% since Monday, to a low of CNY 507.1 Thursday. Despite the reaction in Chinese iron ore markets, the Aussie Dollar has taken fears that trade war is looming in its stride.

“We have been surprised that the AUD hasn’t seen more fallout from recent trade war fears,” writes John Hardy, head of FX strategy at Saxo Bank, in a recent note.

So far, the Aussie has posted a 100 point gain over the US Dollar in the last four days, to be quoted at 0.7804 Friday, and is also up against the Pound, Japanese Yen, New Zealand Dollar and Canadian Dollar this week.

“AUD/USD continues to grind higher and further upside probes towards last weeks high at .7892 remain possible. The market needs to clear this resistance to reassert upside pressure to the .7988 middle of February high. Intraday Elliott wave counts are positive and the risk is building for a move higher near term,” says Karen Jones, a technical analyst at Commerzbank.

One possible explanation for the Australian Dollar’s resilience this week is that it may already have weakened sufficiently, perhaps even excessively, beforehand.

After all, the January 26 to March 01 sell off in the Aussie Dollar had pushed the AUD/USD some 5% below its 2018 peak before Jones and other technical strategists began flagging the downtrend as running out of steam.

“While upward momentum is not strong, the recovery from the 0.7772 low has room to extend higher but a sustained move above 0.7850 seems unlikely (this level is followed by another strong resistance at 0.7880). Support is at 0.7795 followed by yesterday’s low near 0.7770,” says Quek Ser Leang, a strategist at UOB Bank in Singapore.

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