Cohn Resignation: Trade War Would Bad for British Pound warn MUFG

Above: Director of the National Economic Council Gary Cohn | Official White House Photo by Evan Walker

The US Dollar is tipped to maintain a soft tone amidst concrete signs that Trump will pursue a protectionist trade agenda. But, Pound Sterling could be another longer-term loser we are told.

Gary Cohn will resign from the White House as President Trump’s top economic adviser, days after President Donald Trump alienated key staff members by announcing steel and aluminium tariffs.

Cohn and various significant Republican party members are firmly opposed to the tariffs seeing them as presenting potential additional economic challenges ahead.

Analysts believe the prospect of a higher tariffs and a global trade war has become more real and this does not bode well for the Dollar.

"Gary Cohn’s resignation signals that tariffs will go ahead," says Isaah Mhlanga, an analyst with RMB in Johannesburg. "The resignation of Cohn, prompted a renewed sell-off in the US Dollar, with the EUR/USD trending towards 1.24 from 1.22 a few days ago."

White House officials insisted that there was no single factor behind the departure of Cohn, who heads the National Economic Council.

But his decision to leave came as the New York Times reports Cohn appeared poised to lose an internal struggle over Trump’s plan to impose large tariffs on steel and aluminium imports.

In a statement given to the New York Times Trump said: “Gary has been my chief economic adviser and did a superb job in driving our agenda, helping to deliver historic tax cuts and reforms and unleashing the American economy once again. He is a rare talent, and I thank him for his dedicated service to the American people.”

Trump says he will be choosing a replacement "wisely."

"Today, uncertainty on the US trade policy will remain the key factor for global FX trading. For now, the issue is a negative for the Dollar," says Piet Lammens, an analyst with KBC Markets in Brussels.

The European Union is meanwhile said to be readying retaliatory tariffs with US whiskey, jeans and motorcycles being tipped to receive higher import tariffs. This is what a trade war looks like, and there are unlikely to be any winners.

Indeed, US motorcycle producer Harley-Davidson's response sums up how trade wars are a lose-lose:

In a statement, Harley-Davidson warned, “import tariffs on steel and aluminium will drive up costs for all products made with these raw materials, regardless of their origin. Additionally, a punitive, retaliatory tariff on Harley-Davidson motorcycles in any market would have a significant impact on our sales, our dealers, their suppliers and our customers in those markets."

Roughly 16% of Harley-Davidson’s sales are to Europe.

"We can have a recession on both sides of the Atlantic," says an economic briefing from Germany's Commerzbank.

Analysts at ING Bank N.V. say the trade war adds to their expectations for a weaker Dollar narrative to dominate 2018 with a further 5-10% decline in the Dollar seen.

This Could be Bad for the Pound too

While the Dollar is the obvious subject of a global trade war sparked by the US, it would be unwise to lose site of that word 'global' as there will be other winners and losers when it comes to currencies.

"We expect commodity-based FX to perform poorly while we view trade protectionism risk aversion as GBP negative. This is increasingly looking like a global environment that is unfavourable for the UK and the task that lies ahead in dealing with Brexit," says Derek Halpenny, an analyst with MUFG in London.

Cohn was seen as being decidedly opposed to the tariff move and his resignation therefore does not come as an huge surprise, "but, with Cohn being ‘in the know’, it might also suggest that he anticipates further action ahead," says Hardman.

MUFG note speculation of more to come from President Trump on protectionism policies is being fired up by reports that Peter Navarro could take over from Cohn. H.R. McMaster may well be next to leave.

McMaster was seen to be opposed to using the guise of national security as reason for implementing the tariffs and was an ardent supporter of Cohn in opposing the tariff measures. President Trump appears determined as ever in pushing ahead.

But, readers should also take away with them this nugget from Morgan Stanley's Hans Redeker on the uncertain nature of trade wars.

"Trading a political market is risky by nature and reactions are often not lasting," says Redeker in a note dated March 7. "We continue to see prospects of risk rallying as global growth and corporate earnings remain robust."

If he is right, Sterling might yet walk away unscathed, particularly as the UK is one of only two countries the US has a trade surplus with - the administration will want to protect this advantage.

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