Trump shifts from trade to currency war; Sterling in focus

April 17, 2018 08:21 AM

The strong performance of U.S. equities on Monday and better than expected Chinese GDP failed to inspire Asian markets today. Equity benchmarks in Tokyo were slightly lower along with China’s CSI and Kospi 200, while Australian ASX rose on support from the materials and consumer sector.

China’s GDP managed to beat expectations coming well above the government’s target of 6.5% and economists’ expectations of 6.7%. The economy grew 6.8% in the first quarter of 2018, supported by robust property investments and consumer consumption. However, there’s a lot of doubts that China can sustain the pace of growth, given the uncertainty around trade. Separate data today showed that industrial production in February declined to 6% from 7.2% and fixed asset investment also fell by 0.4% to 7.5%, which supports expectations of the economic slowdown ahead.

Sterling – the best performing currency

Currency traders were impressed by Sterling’s performance which has been on the rise for seven days straight. The British pound/U.S. dollar (GBP/USD) currency pair reached a high of 1.4354 in Asian trading session, a level last seen on the Brexit vote. With more than 6% gains since the beginning of the year, the pound is currently the best performing major currency. While the dollar weakness partly explains sterling’s strength, higher risk appetite, Brexit negotiations, and surging short-term interest rates were the key attributes to the surging pound. Whether the next level is 1.45 or a correction is due, most likely depends on today’s data release. Expectations for a rate hike in May rose above 90%, and now a confirmation from average earnings to justify this move is needed. If average earnings for the three months to February edged up to 2.8% from 2.6%, this would be the first-time wages grow above inflation levels, which currently stand at 2.6%. Unemployment is expected to remain steady at four decades low of 4.3%.

"Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!" President Trump

The U.S. dollar took another hit after President Trump said on Twitter that Russia and China are playing the devaluation game as the U.S. keeps raising interest rates. His statement contradicted the Treasury Department report which said no U.S. trading partner is manipulating its exchange rate. In fact, the USD has depreciated by almost 10% against the CNY since the beginning of 2017 and has been declining against the RUB until he decided to scrap new sanctions against Russia on 6 April. It seems that President Trump might be looking to focus on currencies next to influence his trade battle. This explains why the gold didn’t fall despite the risk-on mode seen yesterday.

About the Author

Hussein Sayed is chief market strategist at FXTM.