US to impose 50 billion worth of tariffs on China may cause investors to bail out of greenback, short USD/JPY?

Fed Chairman Jerome Powell raised rates last week and cited a stronger outlook for the economy. However, he was cautious to not send signals about the path of policy. FOMC repeatedly mentioned they anticipate “further gradual adjustments in the stance of monetary policy.” The fear of a pending trade war between US and China overshadowed all the economic data last week.

President Trump has signed the presidential memorandum last week which will target up to 60 billion worth of tariffs on Chinese imports as recompense for alleged intellectual property abuses. China retaliates with levies on $3 billion of US imports of pork, recycled aluminum, steel pipes, fruit, and wine. Although China are negotiating in Washington for US to withdraw the tariffs, chances are low as Treasury Secretary Steve Mnuchin on Sunday said President Trump had no intention of backing down and was not worried about a trade war.

In a trade war, certain currencies outperform others. This is especially true as we saw a huge inflow of funds going into safe havens such as Yen and Gold. The strengthening of the yen has caused USD/JPY to hit all-time lows since November 2016. Gold, on the other hand, has risen 400 pips to re-test the 1350 price ceiling once again.

The last prominent trade war of the 20th century was started by the Smoot-Hawley Tariffs act of 1930 led by Canada which imposed heavy tariffs on close to 20,000 imported goods. America’s trading partner retaliated with tariffs on US exports which plunged 61% from 1929 to 1933. It was almost certain that no country “won” the trade war. The only country that can possibly win are countries that are not part of it.

Another unintended victim of this trade war is the Australian currency. As China is still Australia’s biggest trading partner, they are very much affected by China’s implications. Furthermore, China’s growth might be affected which might decrease their demand of exports from Australia.

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