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#1 03-08-2019 20:42:03

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EUR/USD: what are the consequences of Trump's new Chinese tariffs?

EUR/USD: what are the consequences of Trump's Chinese tariff announcement?

President Trump threw a curveball to the markets on Wednesday, saying there would be new tariffs of 10% on 300 billion Dollars of Chinese imports starting in September.

This announcement startled the markets, as Trump and Xi had reached a truce in their trade war following the G20 in Japan, at the beginning of summer.

In addition, US negotiators led by US Secretary Mnuchin and Trade Representative Lightizer visited the Chinese this week, which had prompted the market to anticipate progress in the discussions.

But based on Trump's announcements last night, and the announcement of new trade sanctions against the Chinese, it can be said that the discussions may not have been very positive in the end.

What's going on with interest rate cut expectations?

What is interesting to note is the particular timing of Trump's tweet. It came less than a day after a Fed meeting deemed less dovish than expected, which had caused stock markets to fall and the dollar to surge, to Trump's great regret, as he had no hesitation in strongly criticising the Fed's position, which he felt was not sufficiently flexible.

And given that this week's interest rate cut was justified mainly by the risk posed by the trade war with China, it is not impossible to imagine that Trump knowingly increased this risk by taxing China again, to force the Fed to relax more quickly.

What is China going to do?

According to G. Sachs analysts, Donald Trump's latest threat to impose high tariffs on Chinese products will probably push China to accelerate measures to protect its economy.

With increased uncertainty abroad, China will need to support its domestic economy to achieve its growth target of 6% to 6.5%", says Tim Moe, analyst at G. Sachs.

"We believe that one thing China will do is to continue to stimulate the domestic economy," adds T. Moe.

"China has introduced a series of measures such as easing monetary policy and tax cuts to support its economy. Other measures will likely take the form of tax incentives," says the analyst.

Citi analysts say that the latest round of U.S. tariffs on Chinese products would reduce Chinese exports by 2.6% and reduce GDP growth by 50 basis points. This is in addition to the economic damage already caused by previous tariff hikes.

Iris Peng, of ING Bank, says that China might want to extend the tariff fight with the US because "a full blown trade war is not likely to help Trump's chances in the 2020 election".

"We believe that China's strategy in this escalating trade war will be to slow down the pace of negotiations," she says. "This could lengthen the negotiation process until the next American presidential elections."

What will happen on the forex?

By increasing the likelihood that the Fed will ease its monetary policy further, the escalation of the trade war could hurt the USD.

It should be noted that this has already resulted in a rise in the EUR/USD pair on Thursday.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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