Trade War Tension Returns to Market

BACK INTO THE SPOTLIGHT - Into 2018, there was a lot of US Dollar selling going on, with the market positioning for a global trade war, as the US administration looked to be pushing ahead with its soft Dollar policy involving protectionist measures. These measures would take the form of aggressive tariffs against its trading partners that would ultimately, force the currencies of those partners to appreciate, and the US Dollar to depreciate by extension. This strategy is not a strategy rooted in insanity either. While it has not been the practice of the any US administration to talk weak Dollar, the effect of such a policy would help get that disturbingly high US deficit in order, with the US export economy becoming more attractive and the US shipping out more than it would be consuming. There has been a competitive advantage in many countries on the export front, with these countries benefiting from their weaker currencies, as they attract demand from abroad. And so, the US administration is trying to change this dynamic and this was a big deal into 2018. The question is, will it continue to be a big deal?

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HERE'S HOW IT CAN HAPPEN - I believe it will be. The challenge is in being able to push forward with this effort without distraction, without opposition from a Democratic party that has regained control of the House, and without any major retaliatory efforts from US trading partners, as seen earlier this year. But I think this challenge will be met. Why? As far as distractions go, this could be used as a wonderful distraction by the US administration if the stock market starts falling at a more aggressive clip as I believe it will (impact of policy normalization). The point here is that when things go bad, the government will look to unify the country with a campaign that highlights anti-American policies abroad. As far as Dem opposition goes, it isn't as clear here the Dems would be in opposition to such policy. The House minority leader is a Dem and is a staunch anti-China hawk. Furthermore, the President has more executive power in this area and it wouldn't be easy to thwart efforts on this front. Finally, as far as retaliatory efforts go, I think a lot of that has already been exhausted and don't see retaliation as being nearly as effective as it was earlier this year. In short, all of this points to a weaker Dollar, especially against the major currencies. Risk correlated currencies will react differently because of the negative flow that might come from a concurrent bout of risk off trade.

Will the US administration still be able to push forward with its soft Dollar policy initiative?

Friday Position Review

Looking at the current exposure as we head into the weekend.


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