Financial markets are too inert to the threat of global trade war

If the USA is trying to build a wall around the country’s metal industry, China by all means tries to get around this wall. According to competent sources, China, as a response to cancel of the US import tariffs, is willing to increase purchasing of the US soybeans, corn, natural gas, oil, coal and other goods. Bloomberg reports $25 bn during the first year, Wall Street Journal - $70 bn. Remember, Donald Trump wants to cut foreign trade deficit by $200 bn in two years by means of Beijing, but logic suggests the process could last for years.

In general, financial markets seem to be too calm despite the growing risks of global trade war. Especially ahead the G7 summit, where they are going to seriously discuss the US protectionism. What’s the matter? Investors may have overestimated approaches to Donald Trump’s personality. He turned from an eccentric president into a wise businessman, who has his scheme and is going to achieve the reduction of foreign trade deficit in the end. A part of the market participants assess the share of the announced tariffs in global economy, comparing it to a drop in the ocean. Other investors just don't know how to trade protectionism.

The past experience suggests anti globalism should be a bearish factor for dollar. First, there will be constant rumours in the market that the US administration seeks to get dollar weaker. Second, non-residents, amid the uncertainty and constant threats, will withdraw their money from the US assets. And finally, the greenback’s 7-week rally will start to fade out. It has mainly resulted from the weakness of the US rivaling economies and Italian political crisis. In fact, the spread between the US and European composite PMI has entered the red zone for the first time over many years.

Dynamics of PMI in Eurozone and USA

Source: Bloomberg

The ECB really hopes that European economy will manage to restore during the rest of 2018. Besides, the rumours that the ECB will announce the end of QE at its meeting on June 14 will strongly support EUR/USD bulls.

As for Italy, the new Prime Minister Giuseppe Conte tells Parliament that "Leaving the euro was never up for discussion."  So, investors were calmed down. According to the recent polls, the number of people, willing to get back to the lire, is decreasing. Ipsos research has shown that this number is down to 29%, from 33% in February, 2017. Only 20% of Eumetra respondents are willing to leave the euro. In early 2017, there were 38% of them.

Surveys results on Italy’s future in euro zone

Source: Bloomberg

Growing tension ahead the G7 summit, speculation about the ECB optimism at the upcoming meeting of the Governing Council next week and gradual easing of Italy’s political crisis are building the grounds for EUR/USD bulls’ attack on the resistance at 1.175.

 

Dollar: be Calm, just be Calm!

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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