Donald Trump will announce new tariffs on China by the middle of the week. Some are predicting this move will launch unprecedented waves of volatility across the currency markets. The NZD/USD pair has collapsed to near 0.5660. This decline occurs just as fears mount over future tariffs set to touch all of the United States’ trading partners. Trump’s action is part of general trend of increasing trade-weighted average tariff rates. These rates have gone up by an average of 5.5 to 6.0 pp on all US imports. Both analysts and investors are closely watching the key macroeconomic data unfolding in the US. This leaves the all-important US S&P and ISM Manufacturing PMI for March, due out on Tuesday, still to come. February’s final manufacturing PMI score was 50.3, and the manufacturing data is expected to tick down to 49.5.
Financial market participants are understandably spooked by the economic wreckage that could result from Trump’s radical economic agenda. In reaction, Goldman Sachs just boosted their odds of a recession from 20% to 35%. Of all US trading partners, the Chinese economy runs the largest trade surplus. These tariffs are projected to place a crushing burden on it. Furthermore, the current tariff levels are nearing historic highs not seen since the end of the Second World War, raising concerns about a potential trade war.
Economic Data and Market Reactions
Investors are focused on some major economic indicators that may offer clues on what direction the market might take next. Tuesday March US S&P/ Markit Manufacturing PMI and ISM Manufacturing PMI This data should help paint a clearer picture of the health of the manufacturing sector. The forward-looking PMI index is projected to fall to 49.5 from February’s 50.3. This drop represents the first contraction and raises fears of an economic slowdown.
Yet the possibility of a recession continues to be the subject of debate between analysts. Even Goldman Sachs has increased its recession likelihood prediction from 20% to 35%. This change is a recognition of the increasing political salience of the impact of protectionist measures on the US economy. Financial market participants are concerned about these issues, with some of them speculating that the economic policies to be adopted under a Trump presidency may increase recessionary pressures.
As a result, investors are eagerly awaiting the next announcements. At the same time, surging economic pessimism has pushed down Treasury bond yields, a trend which favors zero-yielding commodities like gold. The price of gold is going through the roof. It did so far, and it is headed towards $3,150 as investors run to safe-haven assets in this unprecedented time.
Impact on International Trade Relations
Issuance of these new tariffs has recently generated new concerns of an impending trade war. The root of this conflict is extreme protectionism that endangers our economy. Trump’s assurance that tariffs will be applied to all of the U.S.’s trading partners further highlights the risk of damaging international relations. The Chinese economy is under severe strain as it tries to juggle these significant and powerful changes. Its status as the US’s biggest holder of trade surplus compounds these difficulties.
Since taking office, President Joe Biden has largely maintained those tariffs implemented under Trump. This would be in addition to new levies he’s introduced since taking office. This continuity from the Trump to Biden administration sheds further light on the troubling undercurrents of global trade imbalances and what they could mean for upcoming diplomatic talks.
The impact of these tariffs reach farther than the US-China relationship. Given how wide-ranging the measures announced are, other countries can expect to be affected. The global economic landscape may witness shifts as nations respond to protectionist policies and seek to balance domestic interests with international cooperation.
Currency Market Movements
The NZD/USD currency pair’s drop to below 0.5660 indicates increased investor concern over what the impact of additional tariffs will be. Currency markets are seeing heightened volatility as traders start pricing in the broader impact of protectionist measures on global trade.
At the same time, other key currency pairs are showing significant action. As the new week begins, the GBP/USD trades in a short-term range between 1.2900 and 1.2950. This price movement indicates that traders are already being cautious as they look forward.
Financial markets are already responding to economic uncertainties and geopolitical tensions. In turn, currencies should continue to be reactive to each meeting announcement and important data release going forward. How the varied economic signals and resulting policy directions affect market participants’ sentiment and actions remains to be seen in the days ahead.