Navigating Trade Winds
The deterioration of trade relations between the United States and various other economies has already spilled over into the currency arena. In the case of the yuan (USDCNH), a recent fall in the value of the Chinese currency has arguably exceeded any correction to compensate for broader recent Emerging Market currency and has incorporated China-specific market concerns which themselves, if only in part, spring from market worries about a China-USA trade war. There’s even a plausible argument that, at a time when Australia has its own trade issues with China, a weakening of the yuan is also weighing on the value of the Australian dollar (AUDUSD) given the intricate trade relationship between China and Australia which in recent years has seen many market participants seeing a view on AUD as a quasi-play on China itself. Elsewhere, although a lot of emphasis in the media has been placed on the negative effect on German car exports if the United States does decide to levy a tariff on automobile imports, which would naturally be evidenced in the currency space in EURUSD, if those tariffs were general as opposed to being geographically specific then Canada and Mexico (USDCAD, USDMXN) might be even more adversely affected given the volume of cars those two countries export to the United States. If the Trump Administration does go down that road, and for the moment the key word is ‘if’, the consequences for currencies may be much wider than just for the EUR. In a similar vein of thought, it might be worth bearing in mind that Atlanta Fed Chief Raphael Bostic said on Tuesday that, as he feels intensifying trade tensions pose a risk to the US economy, if US trade relations with other economies continue to worsen, he could revise down his current feeling that four Fed rate hikes in 2018 are appropriate. While Bostic is only one voter on the FOMC, if the currency market were to conclude other FOMC voters might have similar thoughts, then traders could decide a pillar of USD support might be eroded if trade tensions intensify. The bottom line is surely that trade wars can elicit complex market reactions. Traders may need to keep open minds.
Written by Neal Kimberley, External Currency Analyst.