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The US / China Trade Deal and its Impact on emerging market currencies

Written by - Reviewed by Glozine Team

Published: Jan 7, 2019 | Last Updated: Jan 7, 2019

The festive season is upon us and while there is no doubt that, apart from the continuing Brexit crisis, the news and events about the US/China trade deal seems to have taken a back seat for now. However, things will pick up in the New Year, once everyone is back at work.

The US / China Trade War: Where we are at

On 2 December 2018, the United States of America and China announced that they have declared a 90-day truce in their trade war. And, both sides have since met at a vice-ministerial level to discuss “trade and economic issues as part of efforts to de-escalate their trade war.” Additionally, both sides said that the negotiators who are responsible for “hammering out a broader truce” between the two nations will meet in January 2019.

It has also been announced (on 20 December 2018) that the China’s state-run firms Sinograin and Cofco have purchased circa 1.5 million tons of US soybeans even though China has imposed a 25% trade tariff on soybeans imported from the United States.

Consequently, it would seem as though both China and the US are making a concerted effort at resolving the trade war that has lasted for most of 2018. Although, it must be noted that Trump first tweeted his opinion on China as far back as 2011.

Also, when looking at some of the events that took place during this trade dispute between the two nations, that was formally escalated on 7 February 2018, the people living in both countries have suffered at the imposition of high tariffs on imports from each other.

However, the question that begs is which of the two countries suffered more?

The impact of the trade war on China’s currency (and by inference) other emerging market currencies

It is essential to bear in mind that the US Dollar (USD) is the global reserve currency. Simply stated, it is the most important currency in the world. And all other currencies are linked to the USD in a currency pair to determine the value of these currencies. Therefore, whatever the USA does and says with particular reference to its foreign policy decisions, will have a positive, or negative impact on all the other country’s currency.

Thus, it makes sense that the price of the Chinese Yuan slipped against the USD because of both side’s refusal to settle the economic war between the two nations. However, China managed to gain traction in this war by allowing the Yuan to fall against the USD.

Basically, according to Robin Brooks, the chief economist at the Institute of International Finance, the Chinese government alerted the US government to the fact that they didn’t “like what [the US is] doing, and if [they] keep slapping on tariffs, our currency is going to weaken significantly, and [they are] going to have a currency war on top of a trade war.”

CFD trading during the US / China trade war

Therefore, it is not easy to determine which country has suffered more as a result of the trade war between the two nations. For a more comprehensive answer, it is necessary to conduct an in-depth study of the macro- and microeconomic conditions in each country. This topic does not fall within the scope of this discussion.

However, the price movements of the related financial market assets like the USD/CNY currency pair are relevant to this discourse, as ultimately, when trading CFDs we need to track the historical and current price movements so that we can accurately forecast future price movement trends.

Once we have an idea of how the USD/CNY price will move within a stated time frame, we can open a CFD trading position and set stop-loss point and take-profit points.

Final thoughts

It is vital to keep in mind that when trading on CFDs, a trader does not buy and sell the underlying asset linked to the CFD. The purpose of the CFD is to trade on the price movements of the associated asset.

Therefore, a trader can profit from both up and down price movements. All the investor has to do is to utilise the statistical analysis tools that are provided by the online trading platform to determine which way the asset’s price is likely to move.

Finally, the trader then needs to set up a trading position based on this statistical analysis.

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