Trumps Tariff Torpedo ?

Elections two ways 

The two-pronged political risk has apparently  come and gone

The SPD was expected to vote yes for another grand coalition, and the results confirm as such – a clear majority of 66.02%.

In Italy, the most likely scenario for a hung parliament came to fruition. Dealers continue to treat the Eur like hot potatoes not sure where to go given the Italian politics is headed for gridlock.

The results are initially interpreted as mildly supportive for the Euro given the worst case scenario, the Anti-establishment/Eurosceptic coalition in office was averted but is reversing out the initial wave of positivity.  The market remains extremely choppy.  Keep in mind upward momentum should be muted ahead of this weeks ECB meeting so the market will look to fade upticks given the political malaise in Italy will play on.


Trumps  Tariff Torpedo

To say that President Trump proposed launching of tariff torpedo will sink the US dollar could be a huge understatement.

The President’s proposed steel tariffs have tarred both free trade and a soft dollar policy with the same brush. No one expected the first stratagem to be as cutting with such wanton disregard for long-standing allies. Only days before Trump’s tariff torpedo, Defence Secretary James Mattis put public pen to the paper urging the administration to consider tariffs targeted at specific countries and to focus on what he described as the underlying problem — Chinese overproduction.

With widespread reports that the President has ignored the advice of leading advisors, nothing can be ruled out at this stage. But given the international uproar, not to mention the market fall out; the President may consider dialling back on some of the rhetoric. However, hoping for cooler heads to prevail, might be far too optimistic given that President Trump promoted reforms of U.S. trade policies as a cornerstone of his election campaign.Even more so as the war of words escalated over the weekend when The President threatened to levy a tax on EU built cars that freely flow onto the US, in response to Jean Claude Junker threatening a tax on EU  imported Harley  Davidson motorbikes.

But tempering overall rhetoric, A top trade adviser to U.S. President Donald Trump said on Sunday a process would be in place for businesses to get exemptions from the White House plan to place steep tariffs on steel and aluminium, offering the first indication a tariff hike could be less broad than first thought.

As for the currency traders initial reactions, they are talking the talk and walking the walk realising that through US Trade tariffs; Trump is carrying the seeds of the dollar’s destruction. The economic fallout from trade duties would result in a toxic elixir of lower domestic growth and higher inflation, neither of which inspires investors confidence in the dollar. But more significantly, as the soft dollar policy starts to erode the returns on US bond and equity markets, then the more vicious downward spiral takes hold.

When you consider that we may only be in the early stages of Tumps Trade Tirade, with far more critical decisions coming up on China abuse of intellectual property under section 301 of the US trade act, life in the markets could get incredibly messy.

Oil Markets 

Steel tariffs brought concerns that  US trade policy will dent economic growth, but this cause and effect is very unclear as the impact could be specific industry exemptions. But headline risk will continue to run extremely high so traders will stay on red alert.

Energy industry officials raised concerns about the tariffs on steel since the sector relies on imports for everything from pipelines to drilling equipment to liquefied natural gas import terminals.

None the less, it was a stressful week for oil markets as US exports fell, the dollar rose after incoming Fed chairman Powell’s day one testimony, Libya reportedly increased supply and Iraq agreed in principle with Kurdistan on restarting Kirkuk pipeline. But more importantly, the upswing in US Shale production estimates continues to march higher.

If there was ever a compelling argument for OPEC and US shale producer to see eye to eye, now is the time. OPEC will host a dinner on Monday in Houston with US shale firms, at a time when US oil production is blasting through 10 million barrels per day. Sure  OPEC and Non-OPEC alliance remain at record high compliance, but with Russia continually pressuring for an exit strategy, OPEC will look to offer an olive branch to US shale.Perhaps a universal realisation that all producer, OPEC and US Shale alike, need to tame a global oil glut could lead these long-standing Oil Patch Frenemies to work collectively towards similar goals, higher oil prices. As such, we should interpret any positive developments from the meeting as support for underly oil price sentiment.
Gold Markets

The Impact of the steel tariffs inflationary concern is tangible and could give cause for the Fed to raise interest rates four times this year. As far as Gold traders are concerned, however, the inflationary impact of trade war escalation will overwhelm the effect of higher US interest rates.And despite the prospect of higher US interest, it will not translate into a stronger due to inflationary concerns. So any escalation of trade wars will significantly dent the US  dollar appeal, weigh negatively on US assets such as bond and equities and make gold the go-to hedge against rising US fiscal and political vulnerabilities.

Currency Markets 

Look for USDJPY to carry the truncheon for the possible dollar demise led by speculative selling in JPY crosses while currency markets maintain an overall dollar harmful proclivity if US trade sanctions escalate


The Japanese Yen

Trade wars and geopolitical concerns are JPY-positive, as the market chases haven assets amidst growing uncertainty. Also, Kuroda signalled that the BoJ might start considering an exit from its extreme unconventional policy in 2019. If history tells us anything bout currency traders is that they will trip over one another at any hint policy normalisation as you can make three years of your trading budget riding the early wave. Such was the case of last years move on the Euro( 1.0600  to 1.2550)  when traders surmised an ECB policy shift was afoot. Sure Kuroda suggestion is well down the road, but if we continue to get less verbal intervention from Japans currency regulators, it could be a signal the centeral bank is preparing the market for that eventuality. Indeed, allowing the JPY to carry the load during the early stages of squeezing financial conditions so that the fallout from  YCC removal will be less market impactful. Also, we could see a growing appeal from global equity investors looking to build Japan exposure as Japanese corporates are clocking in record performances on relatively cheap equity valuation metrics, which could provide an added fillip to Yen sentiment.  Of course, we know that currency markets seldom move in a straight line, but with the BoJ smoke signals looking ever so convincing, a bumpy move lower could be in the offing.   Coincidentally, we have the BoJ rate announcement later in the week, and I’m sure Kuroda’s follow up presser which should be fully subscribed by traders as its bound to filed some fascinating question this time around.

The Australian Dollar

The US ‘s international trade objective may see AUD underperform, but it would need commodity prices to fall off the ledge for a more profound move below the fundamental .7500 level.But the reality is that Trumps Tariff on metal prices could hike commodity prices.

And while the Aussie is running into some severe headwinds from the weaker than expected China PMI’s, the hic-ups are most likely due to seasonal factors so it’s far too early to downgrade China’s economic growth which should continue to drive commodity prices higher.

Interest rate differential is having little effect on currencies, so we look for commodity prices and the broader US dollar narrative to drive local sentiment

The Aussie should remain well supported by 75-76 via global commodity prices while a  move above 80 will be fleeting due to the contrary and negative domestic economic impact the backwards-looking economic data will show from the effect of a stronger A$

If you are looking for downside exposure on a commodity block trade, short CADJPY beckons.

The Canadian Dollar

If Trump emphatically holds firm, Steel  Tariffs will all but derail NAFTA talks and given that this will throw longstanding homogenous cross-border trade upside down, CAD is the most vulnerable G-10  currency to Trump’s tariff torpedo. Given the lack of enthusiasm over the latest GDP prints, while expecting the BoC to err dovish given the recent consumer data and US trade intentions, the market will be looking to build short CADJPY positions as trade war rhetoric escalates.

Before everyone maxes out on short CADJPY, it could be a ruse and little more than a trial balloon to gauge the equity market reaction, maybe wishful thinking).


Asia FX

The Chinese Yuan 

In China, the first plenary of the National People’s Congress( NPC)  will be held, with significant state positions to be elected and the all-important ‘term-limit’ motion to be voted on.But the markets will remain overly focused on the global trade dynamics in the wake of Trump’s tariff shocker. And both the CNY and USD will be the dominant focus this week given that the escalation of protectionist rhetoric. The mainland can stop this trade war rise dead in its tracks by releasing a symbolic a peace dove in the form of a lower tariff on imports from the US.  Will the NPC provide the platform to offer this olive branch, only time will tell? With that in mind, reports are circulating that China is seeking high levels of meeting with the US to defuse trade tensions.

The Malaysian Ringgit

It’s hard to envision Steel Tariffs derailing the underlying trends for the global economy. However, an escalation of an outright trade war could. From a regional perspective, the impact of the new Steel Tariffs will have a muted regional effect as China is not a significant supplier to the US markets. On this realisation, $Asia eased off the knee-jerk tariff reaction as higher yielding local bonds rallied as US Treasury yields collapsed with the Ringgit outperforming regional pairs on the back of foreign capital inflows.

However, if Trump does ante up his trade rhetoric, you can be sure that Asia lies squarely in his sights. But even in this environment, the MYR should be a relatively safer bet vs more prominent US export sensitive currencies like the KRW and TWD. Unfortunately, there is no playbook on how trade tariffs will play out and trying to understand the politics of trade wars even less comprehensible, but the Ringitt should hold up well relative to its regional peers

The market will quickly pivot to this weeks BNM, and while the new domestic inflation metrics give little cause for the bank to raise interest rates, traders will continue to focus on forwarding guidance. But at this stage, we’re not expecting any upgrade on the centeral bank’s monetary policy.


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes