Trade war between the US and China - what can traders expect?
At the beginning of 2018, the President of the United States unleashed the largest ambitious trade war of the 21st century. Her tool is an increase in duties. The main task of the American president is to fulfill election promises in the form of reducing the trade deficit, which at the time of the 2016 election amounted to $ 335.4 billion. What should currency speculators expect in the market? Let's understand.
Not agreeing with China to increase trade at personal meetings of the two leaders of the countries and during state negotiations, the White House gradually increased duties on all imports from China in order to combat trade deficits. Additional pressure measures include a ban on US firms and US government agencies from working with Chinese technology companies ZTE and Huawei (the “black list” will expand in the future) and the demand for boycott support from allied countries: Great Britain, Australia and Japan.
Chinese authorities responded with similar measures to the United States. True, the Celestial Empire is lagging behind in the amount of duties due to the lower volume of imports from the United States. Plus, part of the duties, especially for the commodity group of goods, is deliberately underestimated so as not to weaken the economy, where there is a process of growth slowdown:
The next step is the refusal to supply US companies with rare earth metals and the sale of large volumes of US Federal Reserve bonds (Halyk Bank holder of $ 1.1 trillion of US debt).
Donald Trump is confident of victory - this is not his first trade war
The American president has already won two trade wars, persuading partners in the North American free trade zone Canada and Mexico to sign a new treaty and “breaking” Mexico recently, forcing it to close its borders with Central America from the invasion of migrants.
Now Donald Trump is on the path to revising the treaties with Japan and the European Union - they also have experienced the threat of being subject to duties on the auto industry, raw materials and some goods produced only in these territories.
Trade war will inevitably end in economic crisis
Most experts believe that the causes of the trade war are the fulfillment of President Trump’s campaign promises and alignment of the trade balance with all countries. “America Above All” is a famous slogan that justifies protectionist policies.
However, in the confrontation with China and a number of other countries, American business directly suffers, and not only from the response of opponents - a large number of US companies are located abroad.
The trade war with China will not be completed, - this is indicated by the White House’s reluctance to sign an agreement in May and the failure of all further Celestial attempts to continue negotiations. Donald Trump needs to provoke an economic crisis in order to defeat him. This is the key to his successful nomination for a second term and the opportunity to enter world history along with Franklin Roosevelt, who defeated the Great Depression.
A year is left before the election, so Donald Trump is ready to "go further", having promised in July to impose additional duties on another $ 300 billion of imports from China.
Forecasts of the effects of the US-China trade war
The slowdown of the Chinese economy will affect every world state, financial instrument, raw materials and agricultural consumption. The Chinese authorities have nothing to oppose to American protectionism: any retaliatory actions play into the hands of Donald Trump's goals and only worsen the situation even further.
The forecasts of international financial institutions - the World Bank, IMF, OECD - are unanimous in assessing the impact of the trade war. They believe that the current growth of 2019 will be replaced by a slowdown and subsequent stagnation of budget revenues of developed and developing countries. Statistics predicts a fall in world GDP by 1.5%, and international trade by 6-8%.
Against this background, the Central Banks are forced to return to lower rates and the resumption of various programs to stimulate the national economies. In 2019, the Reserve Banks of India, Australia lowered the interest rate, followed by Canada and the Fed.
- The easing of monetary policy will weaken the national currency to the level of the lows of the early 2000s, repeating the trend of the 2008-2016 Forex market.
In particular, EURUSD quotes will come at a maximum to “Eurodollar parity” or drop to “starting” historical values of 0.9.
- Quotations of "black gold" can reach the bottom of $ 30.
Slowing Chinese economy will negatively affect oil producers - the main global consumer of raw materials will reduce oil purchases. OPEC countries will not be able to compensate for the decline in supply, and some cartel participants will not be able to follow the restrictions due to the budget crisis provoked by a fall in government revenues from the commodity economy.
This in turn will lead to an increase in interest on bonds. The probability of default of state bonds will “warm up” the demand for treasury loans of developed countries.
- Demand for gold will collapse along with the cost of metal due to an increase in interest on government and corporate bonds and the drain of gold reserves by central banks financing part of the budget deficit.
Another blow to the quotations of the precious metal will be a sharp drop in demand for silver, 25% of purchases of which are provided by high-tech industries. This is another battleground in the US-China trade war.
Winners in the trade war - currency speculators
The economic crisis resulting from the trade war will lead to the formation of stable medium-term trends. This will make it possible to "trade in one direction" on simple strategies that use even moving averages, if you select the correct, large periods, use the "positive Martingale", as well as reinvestment strategies and the "pyramids".
However, do not forget that global economic crises are fleeting due to the joint efforts of the Central Banks and financial authorities to take the world economy out of recession.