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The Effect of the Euro-Japanese Trade Agreement on Major Currencies

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With an announcement on Thursday, 6 July, the Euro-Japanese free-trade deal has officially been agreed. Nicknamed “Cars for Cheese”, the pact is meant to increase exports from the European continent to Japan by an estimated €20 billion, writes FXTM staff writer Nikola Grozdanovic. The road to the final handshake has been long and arduous; four years and 18 rounds of negotiations to be exact. Now that the deal has been made in principle, though, how exactly will it affect currency trading?

That question is at the forefront of the collective financial mindset. As Europe continues to steamroll ahead with plans to actualise multiple trade arrangements, speculation is rife that it’s a response to US President Donald Trump’s ‘America First’ position. European deals that have been gestating on the back burner for years are now getting resurrected by Brussels. The CETA (Comprehensive Economic and Trade Agreement) between Europe and Canada was the first to get signed back in May, and now the Euro-Japanese deal follows suit after agreements were finally reached over two major sticking points — automobiles and food exports.

Details of the agreement include removing trade tariffs on nearly 100% of all traded goods between the two parties. This alone could cause ripples in both economic sectors, which together make up 19% of the world’s GDP and just a notch under 40% of all exported goods. Both Japan and Europe come out of the deal feeling slightly victorious; for the former, ending customs duties with Europe (the biggest importer of vehicles on the planet) will be a huge boost to its auto industry. For Europe, minimising Japanese cost on exported meat, wine and dairy was the objective they wanted to achieve and did.

In terms of the markets, the ‘Cars for Cheese’ news came on the eve of the G20 Summit last weekend in Hamburg. Increased access to Japan’s economy (currently the third largest in the world), amplified trader sentiment and cast a positive light on the markets, giving the Euro sufficient protection to stave off lows and get an upper hand over the British pound.

Projecting ahead, this accord teases some major implications. If all goes according to the initial agreement, free-trade between Tokyo and the EU could become a thorn in the paw of American manufacturers – potentially limiting prospects for American companies in both regions. Shino Abe, Japan’s Prime Minister and a key player in the deal, will hope this implication alone will be enough to make Trump re-evaluate Washington’s decision to withdraw from the Trans-Pacific Partnership.

Then there’s Brexit. The deal between Tokyo and Brussels is scheduled to take effect in 2019, just as the UK waves a final goodbye to the Bloc. How and if the attitude of the forex trading markets towards Brexit will change in the next two years is still anyone’s guess, but increased Japanese access to Europe bodes well for the U.K. If Tokyo can realise a free-trade deal, the sensible (and somewhat rhetorical) question is, “Why not London?”

Realistically, there are fewer impediments to such a deal. Exported goods from Britain are not subjected to the traditional limitations that Japanese or Canadian exports may be. The U.K is still regulated under EU trade laws, and its produce meets EU regulations, so the incompatibility of product standards should not prove to be an obstacle in future negotiations between the UK and the EU. A possible free-trade agreement between London and Brussels in the aftermath of Brexit could go a long way towards strengthening Sterling and bolstering investor confidence in the currency.

With the ink still drying on the EU-Japanese free-trade agreement, and with the full impact not likely to be felt until 2019, the influence over the markets remains to be seen. The world is now waiting for a reaction from Washington, and how the deal will play out in the forthcoming Brexit talks and other agreements made between G20 members. With lots still left to play for as the finer points of the accord get hammered out, changing investor sentiment towards the deal will likely impact the currency trading markets for months to come.

 

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NOTES TO EDITORS

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