The Bejing Counter – What’s Next for Trump?

The global financial markets continued to buckle under the strains of the extended U.S – China trade war at the start of the week.

With the Asian and European major equity markets deep in the red, the U.S futures were not doing much better. The Dow Mini was down by 273 points at the time of writing. The NASDAQ and S&P500 were down by 113.5 points and 32.5 points respectively.

Perhaps of greater significance ahead of the U.S open was a slide in U.S Treasury yields, the Aussie Dollar, the Kiwi Dollar and the Greenback itself.

At the time of writing, the Aussie Dollar was down by 0.59% to $0.6761, with the Kiwi Dollar down by 0.37% to $0.6512. The slides come ahead of monetary policy decisions by the respective central banks tomorrow and on Wednesday.

For the greenback, the economic threat to the U.S economy was evident as the Dollar slid by 0.25% to $97.833.

There was strong support for the safe havens, with the Japanese Yen up 0.55% to ¥106.00 against the Dollar. Gold was also on the move, with Spot up by 1.2% to $1,458.17.

Beijing

If the U.S President was looking to kick off a currency war to wage alongside the trade war with China, then it looks to be a success.

The Chinese Yuan took a tumble through the early part of the day. The slide came in response to China’s retaliatory measures to Trump’s fresh set of tariffs due to kick in next month.

News hit the wires in the early hours that China was about to cease the import of U.S agricultural goods. To add to the further pressure, China is also considering withdrawing from trade talks altogether.

This morning’s news and the Yuan’s slide to beyond 7.00 was a clear indication that China would not cower to the demands of the U.S. At the time of writing, the Yuan was down by 1.37% to CNY7.0335 against the Greenback

The Dollar

For the Dollar, the prospect of a prolonged trade with China is certainly negative. While the Chinese economy has suffered as a result of U.S tariffs, the U.S economy has not been unscathed. Last month, the FED was forced to deliver a 25 basis point rate cut.

FED Chair Powell refrained from promising more rate cuts down the road. The FED may be left with little choice, however, but to deliver further cuts.

Retaliatory measures by China will likely have a more material impact on targeted sectors. The FED’s greatest area of focus will likely be labor market conditions. Until now, a tight labor market and solid wage growth had supported household spending. Economic conditions could deteriorate rapidly should labor market conditions weaken.

The latest trade war moves have certainly drawn a reaction from both the Greenback and Treasury yields.

While U.S Treasury yields were on a downward path since the FED rate cut, the Dollar had stood firm. The escalation in the ongoing trade war has been key to bringing sentiment towards policy closer together in recent days.

The markets will be looking out for a Trump response to the slide in the Yuan and China’s intentions.

While the U.S President will unlikely back down, there will be a bigger question to ask. How far is Trump willing to push before having to back down? The Republican Party will be mindful of just how damaging a trade war-driven recession would be to their chances of re-election…

China’s been smart by targeting the much-coveted Agriculture sector. Simply throwing money at farmers may not be enough should China completely shut down the import of Agri products.