Forex is on the verge of the global trade war
Financial markets are so focused on trade wars that have almost forgotten about the FOMC meeting’s minutes and the report on the US employment. Investors are actively discussing whether China will make the first shot or not. Starting from July 6, the USA imposes new tariffs on Chinese imports, including such industries as aerospace and information technology, industrial machinery, medical equipment, worth $34 bn. Beijing pledged to retaliate at the same time by duties on beef, pork, chicken and seafood to SUVs and electric cars. The matter is that the sun always comes up in the east...
Regional characteristics are perhaps the only aspect, allowing to treat the conflict with humour. Donald Trump threatens to levy duties on an additional $200 bn in Chinese products if Beijing retaliates. According to Westpac, taking into account Donald Trump’s election promises, his words should be taken seriously. According to UBS, $34 bn will hardly bother China’s $11-trillion economy, but an additional $200 bn and a decline in global economy can well slow down its 6.9% growth rate in 2017 by 0.5 bps.
Protectionism makes global economic crisis more likely, as it is held in the context of the liquidity reduction in the financial markets. The Fed is normalizing the balance sheet, the ECB and the Bank of Japan are cutting the volumes of QE. As a result, income-earning assets are under double pressure. And it a significant decline in the risk appetite that indicates a soon recession of the global economy.
Dynamics of liquidity volumes by central banks
Source: Financial Times
The main beneficiary of the trade battle between the USA and China, according to Rabobank, will be the greenback. First, it is still seen as a safe-heaven asset. It is proved by the higher inverse correlation between the USD index and S&P 500. Second, the massive fiscal stimulus and the rapid expansion of the US economy is in contrast to problems of the opponents, like the Eurozone and China. As a rule, if the US GDP increases faster than the global economy, dollar grows stronger.
Dynamics of USD and S&P 500
I, personally, think that if the trade wars are scaled up, it can cancel the synchronized restoring of the global economic expansion, put off the idea of monetary normalization by the central banks, competing with the Fed, for a long time and deprive EUR/USD bulls of their main advantage. As increase in the Eurozone Services PMI up to the highest point for the last four months became the light in the gloom for euro fans. They regained the hope that the ECB will gradually restore the economic expansion of the currency block. Will Donald Trump wish to ruin it? Does he need strong dollar? We will see very soon.
The last year’s situation with the US administration’s verbal interventions may repeat, and I don’t recommend ignoring the FOMC meeting’s minutes and the report on the US labour market. The next resistance levels for EUR/USD are close to 1.172-1.1725, 1.178 and 1.1815. The support is around 1.159.
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