Will the US president’s pre-election slogans come true?

Who are you, Mr. Trump? A free-trader seeking to remove all the tariffs in the world? Or a destroyer without clear objectives? The US administration resents China’s responsive measures and develops a new set of import tariffs worth $200. Washington suggests that China introduced $34-bn tariffs without any international legal basis or justification. The fact that the USA was the first to hit is presented as a wish to make China take part in fair competition, whose principles Beijing has been violating for years. Well, each party to the conflict has its own truth.

The news about growing tension in the trade relationships between China and the USA, first, drew dollar up against other currencies due to its safe-heaven status; however, the market still has no clear position how to treat the trade war factor. Such huge tariffs will definitely affect the US economy. Like a boomerang, they will return to the USA, and the US citizens will suffer the most. In addition to the fact that tariffs will result in the higher consumer prices, hundreds thousands of people are going to lose their jobs because the productions will be moved abroad from the USA. For example, German BMW and Daimler, which have their plants in the south of the USA and produce luxury cars to sell in China and Europe, will definitely do something after it has become known that China increased the tariff on car  imports from 25% to 40%.

More and more Americans believe that Donald Trump has failed to keep his promise to cause the most damage to China with the least pain for common Americans, and the derivative market is very responsive to the trade war factor. The demand for risk insurance by means of selling the US Treasuries call options has been the highest since CME Group started recording it in 2008. It is also proved by a 2.4-million wider gap between sold contracts for the Treasuries buying and selling

Dynamics of spread between the sales of put and call options

Source: Financial Times

This situation suggests the bullish conditions in the US debt market, and it limits the potential for 10-year Treasury yields to rise above 3% and is a deterrent to buying the greenback. As the US bond yields are staying at the same levels and the risks of the US economy’s decline are growing, USD is unlikely to repeat its success that was in April-June. The matter is that trade wars suggest fear in Europe. ZEW Economic Sentiment index in Germany has dropped down to the lowest level since the European debt crisis in 2012; and without recovering economic data in the Euro-area, one could hardly expect EUR/USD bullish trend to restore. Meanwhile, the pair is hanging over in the consolidation range of 1.1515-1.1815.

Dynamics of Economic Sentiment index

Source: Bloomberg 

Trade wars will obviously damage global economy a lot; and is there any point in playing poker and raising the bets if the ultimate goal to cut the foreign trade deficit won’t be achieved anyway? So, who are you, Mr. Trump?

 

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Dollar Fails to Keep the Promise

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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