FX round-up: Are currencies the next front in the global trade war?

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Sharecast News | 25 Jun, 2018

Sterling was slightly weaker at the beginning of the week, with the ongoing concerns around Brexit offsetting the bid resulting from the ongoing aggressive rhetoric out of the White House on trade.

Thus, by 2107 BST the pound was 0.32% lower versus the euro at 1.1347, albeit 0.09% higher against the US dollar, changing hands a 1.32770 against the Greenback.

But the really interesting news probably came out during the Asian session.

On Sunday, the US President had put all countries with artificial trade barriers and tariffs on US goods on notice that America would react more than proportionately.

His remarks followed those from European Commission vice President Jyrki Katainen in an interview with daily Le Monde, from the day before, where he said "If [the US] decide to raise their import tariffs, we'll have no choice, again, but to react."

Katainen was referring to the White House's 22 June threat to impose tariffs on EU made cars after Brussels had retaliated against US levies on its shipments of aluminium and steel and which had gone into effect that same day.

It also followed the decision, taken earlier on Sunday, by China's central bank (PBoC) to lower its reserve ratio requirement for the country's lenders by half a percentage point.

For analysts at Capital Economics, global trade was only a factor "at the margin" behind the PBoC's move; indeed, many economists had anticipated a cut in the RRR.

Analysts at UBS on the other hand thought otherwise, telling clients: "So, when thinking of a trade war, think of many different instruments involving, among other, monetary, fiscal and currency policy. So, China is already likely retaliating since the April Politburo meeting with signals of easier domestic policies."

Intriguingly, in the same research note, issued on 22 June, the Swiss broker added: "UBS Economist Tao Wang expects additional monetary (RRRs) easing this year, possibly imminent. The same, of course, applies for the US, which implies that, in a true escalation, a tight monetary policy stance is an impediment."

The next key date to watch for, after 30 June, when the US had already been expected to announce more restrictions on investments by China was 6 July, UBS said.

That was the actual implementation date for US tariffs on China and - possibly - for reciprocal measures from Beijing.

The US dollar rose by 0.55% against the Chinese yuan on Monday to reac 6.5410.

On a related note, UBS said: "The second, forward-looking lesson is from the past and a cautionary one. Most market participants would associate a—US-linked—fully developed trade war with a stronger dollar. But we think they would be wrong. The most aggressive protectionist US actions in the last half century were followed by a weaker dollar."

"[...] What pushes the US to serious trade action is a perceived relative productivity disadvantage, often preceded by an expensive dollar. In other words, trade action is a signal of broader policy action, leading to or involving a weaker dollar."

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