Financial markets will respond to the expansion of the global trade war

While the single European currency is settling the domestic problems, dollar is getting ready for the releases of the Fed’s minutes, the report on the US labour market and for the introduction of the mutual import tariffs, worth $34 bn, with China. It will be the start of the real trade war. Before, the opponents were just showing up the guns. Even since the tariff, announced by the USA, will drive the total amount of introduced in 2018 import duties up to $100 bn, it is not worth the market response. The matter is that it can be up to $1 trillion, which is equal to a quarter of the US foreign trade volume ($3.9% trillion in 2017) and to 6% of global trade ($17.5 trillion). And that is another story.

Washington threatens China with tariffs worth $200 bn and is willing to add another $200 bn if the opponent revenges. Formally, it has nothing to respond with, as in 2017, China’s export into the USA amounted to $505.5 bn, and it imported US products worth only $129.9 bn. In theory, they can increase the tariff per product; however selling out the US Treasuries or devaluing yuan looks far more dangerous. Yuan has reached its almost 11-month low against the US dollar; then, Beijing started slowing the losses. A few large Chinese banks were seen selling USD/CNY; and the deputy governor of PBOC Pan Gongsheng applied verbal intervention, claiming that China needed the stable currency.

Intervention in Chinese yuan speculation
 

Source: Bloomberg

The trade war is not limited by the battle between China and the USA. The EU threats to introduce import tariffs on the US products worth $300 billion as retaliation on the increased tariffs on European cars, imported into the US, up to 20%-25%, from 2.5%, will significantly expand the battlefield. In 2017, the Old World exported cars worth $334.8 bn into the USA. And there is also the NAFTA and other countries. It is easy to collect $1 trillion. And this amount could hardly be ignored by the markets.

EUR/USD bulls managed to hold the quotes above figure 16 base due to the rumours that the migration dispute between Christian Social Union and Angel Merkel’s party, CDU. The opponents need new clues. On the one hand, dollar looks appealing, it is going to celebrate the ninth anniversary of the US economic expansion, which, provided it lasts until 2020, will be the longest on record. The share of the US stocks and bonds in the investment portfolios has reached 60%, the largest since early 2017, which is the evidence of the confidence in the world’s largest economy.

On the other hand, if the Fed says anything about the harm of the strong currency and almost flat yield curve that signals a recession, or about a bad influence of trade wars on the US GDP, investors will think such FOMC rhetoric to be dovish and sell the greenback out.

Dynamics of the US yield curve
  

Source: Bloomberg.

I don’t think that EUR/USD will lose its delicate balance before the important document is released. The most likely scenario is continuing short-term consolidation in the range of 1.152-1.172.

 

Price chart of EURUSD in real time mode

Dollar Dreams of Trillion

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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