From trade to currency war: US-China spat getting uglier on markets


Money-pulating: Stacks of 100-yuan notes at a bank in Nantong in China’s eastern Jiangsu province.China has rejected accusations by Trump that it was manipulating the yuan to give its exporters an edge, saying Washington appeared “bent on provoking a trade war”. — AFP

Money-pulating: Stacks of 100-yuan notes at a bank in Nantong in China’s eastern Jiangsu province.China has rejected accusations by Trump that it was manipulating the yuan to give its exporters an edge, saying Washington appeared “bent on provoking a trade war”. — AFP

THE current trade spat between the United States and China first started with President Donald Trump’s domestic agenda of “protecting the national security” and to punish the nations, which are enjoying massive trade surpluses with the US, which, we all know to be China and to a lesser extent, the Asian-based and other emerging markets exporting nations.

To be exact, Trump made his first move towards “protectionism” on Jan 23 this year with the imposition of 30% and 20% import tariffs on solar panels and washing machines respectively. Although, not specifically targeting at China, it was no surprise that China, being the world leader in solar panel manufacture and exporter of washing machines worth some US$425mil a year, had condemned the actions, deeming it as aggravating to the global trade environment.

As the saying goes, once the shots are fired, there is no turning back. The US then made more trade tariff moves in March thus impacting some US$50bil of Chinese imports, while China reciprocated with similar value of US imports involving products such as cars, soybean, aircraft and wheat, among others. This led to another round of the US tariffs move with Trump considering to impose a 10% duty or up to US$200bil on Chinese imports.

So, how have all these moves impacted the markets, in particular the currency market?

At the end of last year, the US Dollar Index stood at 92.12. On the day Trump fired the first salvo on Jan 23, the Dollar Index was two full points weaker at 90.12, or down 2.2%. At the same time, the yuan was firmer, rising by 0.11 yuan or 1.7% to the dollar.

Locally, in the first three weeks of the year, the ringgit was also performing well, up 3% to about RM3.93 level to the dollar from the year-end closing level of about RM4.05 to the greenback. So, it seems that when the initial trade tariffs were imposed, the markets were not overly worried.

However, as the trade spat escalated with the US not only targeting Chinese imports, but also, the imports from the European Union, Mexico and Canada, the markets became more worried about the escalation in trade war that could result in the global economic growth momentum to be slower or stalled.

Hence, what better way to see this than to observe the daily weakness of the yuan vis-à-vis the US dollar and other emerging market currencies. The US dollar-yuan was last quoted at about 6.7550, down about 4% year-to-date while the ringgit was surprisingly resilient vs the dollar, relatively flat year-to-date.

Nevertheless, all other export-based economies in the region are seeing lower currency values vis-à-vis the dollar with the Singapore dollar lower by 1.6%, the baht weaker by 1.9%, Taiwan dollar dropping by 3%, Aussie dollar down 4.7%, Korean won fell by 5.5%, the rupiah corrected by 6.8%, Philippine peso easier by 6.9% and Indian rupee cheaper by 7.7%.

The US Dollar Index itself is higher by 2.6% year-to-date, clearly showing the markets’ nervousness on the current trade spat between the US and China.

Going back to the US dollar-yuan, which had weakened about 8% over the past three months also suggests that the Chinese perhaps are using the currency as a tool to make its goods competitive for US importers, given the imposition of tariffs by the US.

Where does this leave the ringgit?

The ringgit has been enjoying some renewed correlation with the yuan prior to the recent weakness of the Chinese currency. From November last year right up to about a month ago, the ringgit-yuan was very much range bound between 1.60 and 1.63 and it was only in the past month itself, and in-line with the weaker US dollar-yuan, the ringgit-yuan got out of its comfort zone and was last seen at 1.6672.

From here, we probably will be heading towards several scenarios. First, the US dollar-yuan is on a “forced devaluation” path and is likely to weaken even further. The psychological 7.00 will be a key test for the Chinese currency as well as Washington’s next move, faced with a weaker yuan.

This will also lead the ringgit-yuan exchange rate to weaken further, and would likely surpass the 1.70 mark, effectively making the ringgit or Malaysian made products to be “expensive” vis-à-vis other similar products from other countries, which are substitutes fighting for the same market share.

Given the weaker yuan, the rest of Asia will continue to see their respective currencies turning weaker vis-à-vis the dollar and the current outperformance that we have seen in the US dollar-ringgit will likely see renewed selling pressure as the ringgit can be vulnerable if it stands out as the winner in a currency war.

Trump’s tweet early this week prior to meeting with the European Commission president, which stated that “Tariffs are the greatest!” – this time targeting at the EU, signals his intention that the trade spat between the US and the rest of the world is nowhere near ceasefire and it will likely escalate.

However, the short-term damage was averted after both the US and EU agreed to negotiate further on trade rather than imposing tariffs on each other. Should the trade spat between the US and its trading partners escalate at a later stage, market risk will definitely rise, threatening global trade and challenging the expected global economic growth in the months to come.

Given the rising US bond yields, stronger dollar, weaker emerging market currencies, tougher trade environment, weaker commodity prices (mainly due to the dollar strength), the markets are in for a rough ride ahead, despite the short-term relief that we witnessed recently.

Pankaj Kumar wonders where is the WTO, when you needed them most, while at the same time feels that globalisation has fuelled protectionism in the name of national interest.

Pankaj Kumar