Whether we look at the Pacific region or at US markets we observe elevated anxiety regarding the evolution of the trade disputes. Mutual trust has been undermined, harsher steps are taken, miscalculations abound, and the consequences of all these have implications for all markets including of course the foreign exchange market. As the graph below shows, the Chinese yuan has been weakening against the US dollar since the beginning of the month when the disputes escalated again, and in the next few weeks when Chinese companies will have to pay dividends to the tune of more than $18 billion, the yuan may face renewed pressure and could break the threshold level of 7 yuan to the dollar.
Source: XE Currency Charts
From the moment the administration filed criminal charges against Huawei accusing it of espionage and of stealing technology, all cards are on the table for a full trade war whose effects could only inflict damage on all parties whether they are involved directly or not. We already saw first market reactions for those businesses that supply Huawei with parts and components. Millions of people who used Huawei phones and equipment will be affected across the planet. How the Chinese will react (via fiscal and monetary measures) will be a significant factor in comprehending the possible fallout.
There is little doubt that Chinese behavior needs to be stopped. However, throwing out of the window fundamental trading norms could escalate a trade dispute into a wave that has the potential of undermining growth while creating collateral hostilities which could only inflame bilateral bullying at a time that the US seems to be abandoning its traditional allies. Welcome to the purgatory of late 19th / early 20th century power politics. By undermining international norms and institutions that reinforce agreements and settle disputes, the system will lose its anchor. If that were to happen, then there is little doubt that a currency war would be – incorrectly – perceived as fair game and the advocates of MMT (Modern Monetary Theory) would be crowned kings of that game. However, we cannot lose sight of those effects: An economic boom supported by money supply creates bottlenecks and rising prices. As the latter escalate, growth is suffocated, demand for the currency declines along with the collapse of the local currency, and a silent depression prevails.
While the above scenario may be far-fetched for now, the unfortunate thing is that the escalation of the trade war takes place at a time when Europe is so shaky (along with its banks) and leaderless that the EU-wide parliamentary election results this weekend are destined to undermine the authority of EU institutions even further, and thus become another major force which will contribute to instability and rising uncertainty at a time that Brexit alone can do all that and more.
Furthermore, the escalation of the tensions in the Middle East and particularly with Iran come at a time when the global system is undermined from within. Please do not misunderstand me. I am not talking about a perfect storm. We are probably far from it yet. I am only talking about mapsidios practices which in ancient Greek meant foolish, mindless, irrational, and risky practices.
Happy hedging!
The Bigger Picture: Reverberations and Echoes from Mapsidios Practices
Author : John E. Charalambakis
Date : May 22, 2019
Whether we look at the Pacific region or at US markets we observe elevated anxiety regarding the evolution of the trade disputes. Mutual trust has been undermined, harsher steps are taken, miscalculations abound, and the consequences of all these have implications for all markets including of course the foreign exchange market. As the graph below shows, the Chinese yuan has been weakening against the US dollar since the beginning of the month when the disputes escalated again, and in the next few weeks when Chinese companies will have to pay dividends to the tune of more than $18 billion, the yuan may face renewed pressure and could break the threshold level of 7 yuan to the dollar.
Source: XE Currency Charts
From the moment the administration filed criminal charges against Huawei accusing it of espionage and of stealing technology, all cards are on the table for a full trade war whose effects could only inflict damage on all parties whether they are involved directly or not. We already saw first market reactions for those businesses that supply Huawei with parts and components. Millions of people who used Huawei phones and equipment will be affected across the planet. How the Chinese will react (via fiscal and monetary measures) will be a significant factor in comprehending the possible fallout.
There is little doubt that Chinese behavior needs to be stopped. However, throwing out of the window fundamental trading norms could escalate a trade dispute into a wave that has the potential of undermining growth while creating collateral hostilities which could only inflame bilateral bullying at a time that the US seems to be abandoning its traditional allies. Welcome to the purgatory of late 19th / early 20th century power politics. By undermining international norms and institutions that reinforce agreements and settle disputes, the system will lose its anchor. If that were to happen, then there is little doubt that a currency war would be – incorrectly – perceived as fair game and the advocates of MMT (Modern Monetary Theory) would be crowned kings of that game. However, we cannot lose sight of those effects: An economic boom supported by money supply creates bottlenecks and rising prices. As the latter escalate, growth is suffocated, demand for the currency declines along with the collapse of the local currency, and a silent depression prevails.
While the above scenario may be far-fetched for now, the unfortunate thing is that the escalation of the trade war takes place at a time when Europe is so shaky (along with its banks) and leaderless that the EU-wide parliamentary election results this weekend are destined to undermine the authority of EU institutions even further, and thus become another major force which will contribute to instability and rising uncertainty at a time that Brexit alone can do all that and more.
Furthermore, the escalation of the tensions in the Middle East and particularly with Iran come at a time when the global system is undermined from within. Please do not misunderstand me. I am not talking about a perfect storm. We are probably far from it yet. I am only talking about mapsidios practices which in ancient Greek meant foolish, mindless, irrational, and risky practices.
Happy hedging!