As a Phase I agreement brings an end to a period of global economic turbulence brought on by the US-China trade war, will forex investors benefit from increased stability?
The 19-month trade war between the United States and China has been dogged with false optimism, investor jitters and market fluctuations. Investors on Alpari Forex Trading in the Philippines have watched as the two sides ramped up the fiery rhetoric, then inched towards an agreement, only for an early morning Tweet from the American president to dash any hope of an impending agreement.
However, on Wednesday, the US and China signed what both sides called a ‘Phase I’ trade deal, marking the first step towards normalised trade relations between the pair of economic behemoths.
But what will a Sino-US trade deal mean for ASEAN forex investors? Are the two sides laying down their swords and putting the economic warfare that has dogged global markets behind them? And even if they are, will it bring global economic stability?
When two economic giants go to war, the world takes note
Between them, the US and China contribute almost half of total global gross domestic product (GDP). As the largest global exporter of goods by value, China is a prominent factor in global supply chains and Trump’s announcement of US$34 billion of Chinese imports would be subject to tariffs in 2018 sent ripples across the global export economy.
Since 2018, tit-for-tat tariff introductions have seen the US impose tariffs of up to 25% on US$550 billion of Chinese imports. Beijing has levied tariffs against US$185 billion of US imports to China. But the Phase I agreement appears to signal an end of retaliatory tariff measures.
Under the terms of the agreement, the US cancelled the 15% tariffs due to take effect on US$160 billion of Chinese goods on December 15, 2019. It also halved an earlier set of tariffs levied against US$120 billion of Chinese imports.
China also agreed to purchase US$200 billion of goods from the US over the next two years, US$50 billion of which will come from the US agricultural sector.
The trade war has driven forex traders away from ASEAN currencies
In periods of economic uncertainty, investors flock to ‘safe’ currencies. In periods of escalation during the trade war, the US dollar (USD) strengthened and currencies deemed more risk-intensive, like those of ASEAN nations, weakened.
In periods of increased economic stability, investors become more risk inclined, increasing demand for currencies like the Chinese Yuan, Indonesian Rupiah and the Malaysian Ringgit on forex platforms.
The signing of the Phase I agreement will bring with it a return to risk-on investing and forex trading. ASEAN currencies are already seeing signs of upward mobility. The Malaysian Ringgit strengthened to six-month highs following the announcement, as did the Yuan.
The US and China are not out of the woods
Despite the signing of the Phase I agreement, the global forex and economic markets are not out of the woods yet. The agreement brings a measure of increased stability but leaves many issues unresolved.
25% tariffs on more than US$250 billion of Chinese goods will remain in place, as will many of China’s retaliatory tariffs. The prospect of a serious economic agreement still remains some way off. Beijing wants Washington to remove the existing tariffs, ease restrictions on Chinese investment in the US and dismantle sanctions applied to its tech firms like Huawei.
Washington is unlikely to meet these demands. The US maintains it will not sell technology to China, citing intellectual property concerns and its desire to avoid contributing to the development of China’s tech sector. Trump has made apparent his priority to prevent China’s technological rise, even if that means exports suffer and American consumers pay higher prices.
Negotiations over these major sticking points, which will be dealt with in a Phase II agreement, will be ongoing. The president suggested that a Phase II agreement could come beyond 2020.
The message coming out of the White House is also one of conditional progress. White House Economic Advisor Larry Kudlow told reporters that should major disputes occur, the US will not hesitate to reintroduce tariffs.
The latest geopolitical crisis, an escalation of tensions between the US and Iran, is also stymying investor appetite for risk. Without these mitigating circumstances, ASEAN currencies could have rebounded strongly against the US dollar.
Until the US and China can provide further clarity regarding their future economic relationship, and there has been considerable de-escalation in the US-Iranian relationship, investors can expect muted enthusiasm for riskier currencies. The Phase I announcement affords market players a half-sigh but little more.