In his inauguration speech in January 2017, US President Donald Trump promised to follow a policy of “America First”. The world has since learned this was not merely populist oratory, but a commitment to both a protectionist trade agenda and to withdrawing the US from regional trade deals. In recent months, Trump has launched a series of trade wars with some of America’s largest trading partners: China, Mexico, Canada and the European Union (EU).
The economic upheaval caused by the imposition of tariffs on billions of dollars of trade and the tearing up free trade agreements has caused uncertainty and economic volatility around the world. But for currency traders, two key questions emerge from the Trump trade wars:
What does the Trump presidency mean for the USD?
Where are the forex trading opportunities?
Why “America First” is a strategic opportunity
When it comes to trade, Trump has adopted a confrontational stance with major countries and trading blocs, including the following:
- China. The Chinese economy was a favourite target for Trump during his presidential campaign. Since taking office, he has translated his threats into action through the implementation of tariffs on USD 250 billion-worth of Chinese imports.
- Canada and Mexico. The North American Free Trade Agreement (NAFTA) has been another Trump punching bag. After initiating a renegotiation of NAFTA in August 2017, Trump has combined tariffs and threats in an attempt to bully Canada and Mexico into US-approved submission.
- The EU. The relationship between the US and the EU took a hit in March 2018 when the Trump administration expanded the tariffs on steel and aluminium, which had previously only been imposed on China, to encompass traditionally friendly European countries. Tensions with Europe have since eased, but these tariffs remain in place.
These trade wars are casting a shadow over the global economy. In just one week in April 2018, a combination of Trump attacks on Amazon and a series of retaliatory protectionist policies between the US and China saw stock markets seesaw wildly. The Cboe Volatility Index, or "Fear Index", spiked above 20 — nearly twice its level in 2017.
With each new Trump tweet or retaliatory measure, markets are adjusting their assumptions and expectations about factors such as economic growth potential and trade balances. For traders attuned to market swings and quick enough to act, this volatility creates the opportunity to trade on short-term positions. Many investors prefer to trade currency pairs as a hedge against holding too much of one currency and becoming over-exposed.
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Trump trade wars: A fundamental analysis
With such macroeconomic and political factors in play, it is difficult to conduct detailed analysis to predict how market and specific currency pairs will react. But this is a big part of the challenge — and an attractive opportunity — for forex traders.
At a macro level, there are signs that the market sees Trump’s aggressive trade policies as a downside risk for the US dollar. For example, on 17 September 2018, the USA announced that it would implement a new 10% tariff on USD 200 billion worth of Chinese imports. This escalation of the US-China trade conflict corresponded with a weakening of the US dollar against the euro.
Conversely, when the United States and Mexico announced a preliminary agreement to amend NAFTA on 27 August 2018, the US dollar strengthened against the Mexican peso as tensions diffused and the market reacted positively.
Will American Isolationism lead to a stronger US dollar?
The high-profile nature of recent US economic announcements would suggest that the dollar is weakened by continued conflict between the US and its key trading partners. However, the big picture suggests that the market is still bullish about America’s economy: A strong domestic market and the Federal Reserve’s prudent fiscal policies have made the US dollar the highest-yielding currency amongst the G10. In 2018, despite Trump’s bellicose rhetoric and frequent trade spats, the US dollar has generally strengthened against key trading partners and currencies — including the euro, Japanese yen, Mexican peso and Canadian dollar.
Picking a currency winner in volatile markets
For forex traders, the volatility created by Trump’s trade wars has created challenging but potentially attractive opportunities. Mexico has already made “significant concessions” in its push to secure a tentative agreement with the USA during the NAFTA renegotiations. Similarly, the EU and the USA appear to have reached a truce as they try to negotiate a trade deal. In contrast, China has so far refused to back down. Beijing has met Washington’s tariffs head-on with its own tit-for-tat retaliation. The Chinese side recently pulled out of tentative plans for high-level meetings aimed at resolving the dispute following the latest escalation by Trump.
An isolated US economy could see the US dollar come under greater pressure, creating the opportunity to short the dollar against the major currency pairs. However, should the USA pull back from outright economic conflict with its major trading partners, the dollar — boosted by a robust domestic economy and inward investment — is likely to sustain its upward trajectory.
Currency traders should be aware of both the risk and reward presented by the uncertain economic climate of Trump’s trade wars. Trading with a stop loss helps manage the risk inherent in volatile markets with wide-ranging price movements. The reward lies in the short-term trading opportunities created by the spontaneous economic announcements and policy shifts that have come to characterise the Trump administration.
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