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Infuriating Trump

Today's news headlines:

  • ‘Renminbi falls past Rmb7 per Dollar for first time in 11 years'. Following the latest ratcheting of trade tensions, the Peoples Bank of China allowed the currency to depreciate past 7, a previous red line. This potentially signals a fundamental shift in the negotiations that aren't easily undone. (Financial Times)
  • 'Fiscal stimulus underpins Boris Johnson's strategy'. The new British Prime Minister has promised a raft of new spending measures, in what may be a gambit in the event of a snap election. The rationale for some of the spending measures (e.g. tax cuts) is of questionable help to the economy, and the total cost of his proposal suggests he must dramatically increase borrowing to pull it off. (Financial Times)

Talk loudly and swing your big stick

The latest escalation of the US-China trade tensions will certainly infuriate Trump, and it's unlikely stimulative policies will be able to fix the resulting economic impacts. On Friday, Trump announced his intention to implement tariffs on the remaining 300 billion Dollars of Chinese imports, this time including consumer products. Overnight, China allowed the Yuan to depreciate beyond 7 per Dollar for the first time in 11 years, and ordered state-owned companies to suspend imports of US agricultural goods. Both of these are perennial hot-button issues that Trump has used to bludgeon China in the media element of the trade confrontation.

Stock markets and Treasury yields sank on concern that the trade war will continue to weigh on global growth. Classic safe-haven currencies such as the Japanese Yen and the Swiss Franc surged along with gold. This marks a meaningful change in Chinese tactics, which have been more reserved than Trump's more fiery bombast and suggests a truce is becoming less likely. With few products remaining for the Chinese to tax, it appears they will use Yuan devaluation as a lever to protect its economy from damage sustained by additional tariffs. However, economists argue that a devaluation will do little to curb reduced business confidence and increased uncertainty, which are arguably more damaging than the tariffs themselves.

Bottom line: As downside risks from abroad increase, pressure on the Fed to continue to cut interest rates is mounting. While Powell called the latest insurance cut a 'mid-cycle adjustment', Fed futures markets are still pricing two more rate cuts this year. A faster deterioration in the global economic outlook risks shifting the interest rate path downwards, a welcome move in the Trump administration.


After a gentle pullback from last week's highs, the Dollar seems to be settling within a tighter range. Sterling has traded broadly flat all of last week but is on the back foot in today's open. The continued trade tensions are driving markets. After a second month of contractionary releases in Construction and Manufacturing PMI surveys, an uplift in the Services reading—representing 3/4 of the economy—provides a touch of breathing room. That said, it's uncertain how much support it will offer the Pound when Boris's fiscal agenda is turning the rumour mill.


Despite some very disappointing economic data releases from the EU last week, the Euro appears to have a good deal of support. It helps that just-released EU Services data shows a clear expansion, even if it isn't uniform across member states. Sterling on the back foot means the pair is continuing to plumb new lows.


Euro support and Dollar easing from last week's highs have resulted in a bounce of the pair back into the prior trading range. At the moment, US-China trade headlines are driving markets almost to the exclusion of all else. The Reserve Bank of Australia's rate statement tomorrow may provide some meaningful insight into China's economy, a key trading partner and dominant driver of Australia's external considerations.

All content is written by the Global Reach Trading Desk. The opinions expressed are not the view of Global Reach Group and are not intended as investment advice.