World does not need an emperor, says Lula

Developing nations at the BRICS summit on Monday brushed away an accusation from President Donald Trump that they are "anti-American," with Brazil's president saying the world does not need an emperor after the US leader threatened extra tariffs on the bloc, reports Reuters.

Trump's threat on Sunday night came as the US government prepared to finalize dozens of trade deals with a range of countries before his July 09 deadline for the imposition of significant "retaliatory tariffs."

The Trump administration does not intend to immediately impose an additional 10% tariff against BRICS nations, as threatened, but will proceed if individual countries take policies his administration deems "anti-American," according to a source familiar with the matter.

At the end of the BRICS summit in Rio de Janeiro, Lula was defiant when asked by journalists about Trump's tariff threat, "The world has changed. We don't want an emperor."

"This is a set of countries that wants to find another way of organizing the world from the economic perspective," he said of the bloc. "I think that's why the BRICS are making people uncomfortable."

In February, Trump warned the BRICS would face "100% tariffs" if they tried to undermine the role of the US dollar in global trade. Brazil's BRICS presidency had already backed off efforts to advance a common currency for the group that some members proposed last year.

But Lula repeated on Monday his view that global trade needs alternatives to the US dollar.

"The world needs to find a way that our trade relations don't have to pass through the dollar," Lula told journalists at the end of the BRICS summit in Rio de Janeiro.

"Obviously, we have to be responsible about doing that carefully. Our central banks have to discuss it with central banks from other countries," he added. "That's something that happens gradually until it's consolidated."

Other BRICS members also pushed back against Trump's threats more subtly.

South African President Cyril Ramaphosa told reporters that the group does not seek to compete with any other power and expressed confidence in reaching a trade deal with the US.

"Tariffs should not be used as a tool for coercion and pressuring," Mao Ning, the Chinese foreign ministry spokesperson said in Beijing. The BRICS advocates for "win-win cooperation," she added, and "does not target any country."

A Kremlin spokesperson said Russia's cooperation with the BRICS was based on a "common world view" and "will never be directed against third countries."

Many BRICS members and many of the group's partner nations are highly dependent on trade with the United States.

New member Indonesia's senior economic minister, Airlangga Hartarto, who is in Brazil for the BRICS summit, is to the US on Monday to oversee tariff talks, an official told Reuters.

Malaysia, which was attending as a partner country and was slapped with 24% tariffs that were later suspended, said that it maintains independent economic policies and is not focused on ideological alignment.

 

World leading currencies out of sync

Leading global currencies are rarely on different paths. Yet Japan's yen and China's yuan are slumping against the US dollar, while in Europe the euro is outperforming and sterling is on a tear, says a Reuters report.

"We've got a one in a 100 years pandemic and once in 75 years war and a once in 25 years energy crisis all thrown into the mix together," said SocGen's Juckes. "You’ve got to be 120 years old to have any understanding of this."

With economic and monetary policy outlooks varying, currency moves are increasingly out of sync with each other. This is making the US$7.5 trillion a day global FX market - operating in the aftermath of COVID-19 and the face of war in Ukraine and an energy crisis - more volatile and more unpredictable.

"It used to be the case that if you got the direction of euro/dollar right, you had a good chance of getting everything else right, but now it's a bit harder," said Nomura's G10 FX strategist Jordan Rochester.

The differences between currencies are widening.

Last year alone, the euro fell to a 20-year low versus the US dollar, sterling hit its lowest on record and the yen its weakest in 32 years, as the greenback soared broadly on sharp increases in US interest rates to curb inflation that other major central banks lagged.

The Bank of Japan has dashed expectations that a change to its ultra-dovish monetary policy would come early in 2023, sending the Japanese yen down 9% so far this year, on top of a 12% decline in 2022. That has raised the chance of intervention to stem weakness.

More pain is also anticipated for the yuan, trading near seven-month lows, as well as smaller Asian currencies.

Meanwhile the euro is up 2.5% this month against the US dollar and expected to rise further given a hawkish European Central Bank - and sterling has meanwhile risen over 5% so far in 2023, leaving it set for its biggest annual gain since 2017.

Rochester said Nomura forecast the euro moving to US$1.12 over coming months, implying a further 2% gain from US$1.095 now, and expected the yuan to weaken to 7.30 per dollar versus 7.2 now.

The yuan has slid almost 5% so far this year, hurt by a weak economy and a wide interest-rate gap with the United States.

This week Chinese authorities set a stronger than expected trading band for the currency, a sign that Beijing is increasingly uncomfortable with its quickening slide.

Lee Hardman, senior FX strategist at MUFG, said the dollar's rebound against Asian currencies reflected a reversal of the trades put in place late last year with the post lockdown reopening of China's economy, as pessimism about the growth outlook there grew.

Elsewhere the dollar is not performing as well. It's continuing to weaken against some European currencies and also Latin American currencies.

Hardman said that, as market volatility slows compared to recent years, investors were focusing more on carry trades, exploiting the variances in interest rates and monetary cycles between different central banks.

Kit Juckes, head of FX strategy at Societe Generale, said the focus on monetary policy differences was also a result of uncertainties elsewhere.

"What strikes me at the moment about FX markets is they are more short-term interest rate sensitive than I can remember them being.

"Because we are so uncertain about so many things in this most unusual of economic cycles, we're just going to focus on what the next central bank policy move is."

This is not good news for the yen, near seven-month lows against the US dollar and 15-year lows versus the euro, as the Bank of Japan holds fast to its ultra-loose monetary policy.

Of course given what the world has endured in the past few years, it is maybe not surprising that currency markets have gone a little strange.