The Morning Commentary: Preparing for a Long Siege

Foreign Exchange - Morning Commentary

Preparing for a Long Siege

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
The U.S.’ tariffs on another $200 billion of Chinese exports kicked in on Monday and China has responded with retaliatory tariffs on $60 billion worth of U.S. goods. China has also cancelled the planned trade talks with U.S. treasury officials as it is becoming increasingly clear that trade policy is being run from the White House and not the Treasury department. In the background is the potential U.S. threat on a further $267 billion of Chinese goods.
While the market reaction has generally been muted today with global equities mixed to lower, Asian currencies are generally weaker as is the Aussie and New Zealand dollars. Markets are slowly preparing for a long siege by both the U.S. and China as the trade war is increasingly looking less like a trade dispute and more like a geopolitical clash of political and economic superpowers.
In the short term, China has little political incentive to meet U.S. demands ahead of the U.S. mid-term elections in November. The potential for the Republicans to lose both their House and Senate majorities is looming and voter reaction could also be seen as a plebiscite on President Trump and his policies. China is in a better position politically to play the long game as President Xi of China does not face the same political pressures or opposition party rebuttals. For now, it would appear both sides are digging in for a long battle which could have global repercussions for both trade and growth.
  • A barrel of Brent crude oil traded at almost $81.00 this morning on the back of an OPEC meeting that signaled less urgency to boost output. This price level is the highest since November 2014 and could signal higher oil and gasoline prices in the short run.
  • The key September German business sentiment index (IFO) came in slightly better than expected at 103.7 against expectations of a much weaker number at 103.2. August was revised higher to 103.9. The euro is stronger today as are many European currencies relative to weaker Asian currencies on the back of the U.S. – China trade friction as well as hawkish inflation commentary from the ECB's Mario Draghi. 
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