US: Trade war to extend into the currency arena? - ING

According to Viraj Patel, Research Analyst at ING, global investors are having to contend with a myriad of Trumpian uncertainties: trade wars, geopolitics, sporadic stock market sell-offs, higher USD LIBOR rates and a highly leveraged late-cycle US economy.

Key Quotes

“Oddly FX markets have failed to catch the volatility virus plaguing risky assets (especially equity markets), with the mixed signals sent by these idiosyncratic Trumpian uncertainties rendering currency investors into a state of confusion. It feels that with each subsequent Presidential tweet, the bar for what actually constitutes risk-off in global FX and bond markets tends to increase – and it’s now at a stage where one of these risks, be it a trade or geopolitical war, needs to escalate materially to influence those asset prices that track fundamentals.”

“Equally, it does not look like any of these Trumpian uncertainties are set to fade away in the near-term. In particular, the  US administration’s trade policy has got most observers “spinning around” – the latest being that President Trump is now seeking to re-join the very same TPP trade deal that he withdrew from over a year ago. Yet at the same time, reports state that the administration may be ready to unveil its $100bn tariff proposal on Chinese imports as early as next week (with the US also considering banning inward Chinese technology investment).”

“Daily conclusions on whether US trade policy has escalated or de-escalated is fast-turning into a ‘mug’s game’; we feel that ‘baffling’ remains the best way to describe US trade policy at this stage. It’s worth noting that one of the bigger risks specific to FX markets in the near-term is whether the US administration choose to take their trade clampdown into the currency arena.”

“We’re expecting the US Treasury’s FX report anytime now – and officials could technically label Thailand a ‘currency manipulator’. Doing so, in our view, would put additional pressure on trade surplus countries – like Germany, Japan and China – to stay clear of any policies that depress their currencies, which naturally lends itself to a weak USD (and strong EUR, JPY and CNY) trading environment. The trade-weighted $ could still fall another 5-10%.”