China-US Spat Should Continue Until the Elections

News of another round of tariffs by the Trump administration caught the markets by surprise, as the US appeared relatively willing to reach a trade deal. As the major stock markets reacted with large drops, China retorted with blocking US agricultural imports, further exacerbating the already tense situation.

Donald Trump, despite providing Tweets that “talks were going well” appears to have been secretly unwilling to commit to deal, as this fits his “make foreigners pay” mantra, proclaimed throughout his presidential campaign. Whether we like it or not, Trump is a genius manipulator who pushed the Federal Reserve into lowering interest rates and raised tariff income, showcasing a deep knowledge of international economics.

Both actions serve the US government: lower interest rates mean lower interest payments for new US debt, and doubling the income from tariffs, as 2019 data show, means more government revenue and thus a smaller deficit. This would allow Trump to maintain the tax breaks he introduced, as well as all other forms of social payments, increasing his fan base.

The above are also unintentionally helping another economy: Japan. The Asian manufacturing giant has the most to gain from the imposition of tariffs on its neighbour, given that it can readily replace Chinese exports to the US with its own production. Furthermore, as the Yuan starts to shake, given that even the Chinese government cannot withstand short pressure for long, the Yen gains, as Japan is currently viewed as a safe haven country.

Over the past few days, the Yen gained more than 100 pips against the Dollar and more than 250 pips against the GBP. In of the rare moments when the correlation between a country’s stock market and its currency becomes positive, the Nikkei also rose by 2.6% with the longer-term trend appearing to be on the upside, while in the intra-day horizons it appears that some downwards movements can be observed.

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