Donald Trump sending out a Twitter storm on currency manipulation and railing against the actions of the Fed have brought in an extra dimension for traders to consider this week. His threats to ratchet up the trade dispute with China also means that geopolitics remain a key factor. We consider the outlook for forex, equities and commodities.
Traders may need to come to a realization that President Trump will not back down in the perceived trade war. In a CNBC interview, Trump suggested that the US was “ready to go” all in on tariffs on China. The US imported a total of $505bn from China in 2017 and has already put 25% tariffs on $34bn, with a further $16bn soon to be confirmed. His administration is conducting an impact assessment of a 10% tariff on a further $200bn of imports, but in true sledgehammer style it seems that Trump is ready to tariff all imports from China. This could still be part of his “art of the deal” negotiating, however it does bring the end game with China into focus. Although no indication yet of the potential tariff size, China is increasingly being backed into a corner. China is unlikely to take this lying down and it could force a significant reaction. The IMF already expects global growth to be hit by -0.5% in two years should existing tariffs be imposed, but tis could ramp up. Although the IMF already expects US growth to be hardest hit at -0.8%, the growth of Emerging Asia economies is also expected to be hit by -0.7%. The Chinese yuan continues to weaken as the PBoC as yet shows little real sign of intervention, and this is dollar supportive. The greenback has tended to benefit as flow out of Emerging Markets currencies finds a home in the dollar amid continued FOMC tightening. However, the dollar strength is by no means certain as, incredibly, Trump has also repeatedly broken with convention and spoken out against Fed tightening. A summer lull on forex may not come after all.
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