US: Trump’s devaluation games merely fuelling weak dollar expectations - ING

Viraj Patel, Research Analyst at ING, suggests that like some sort of game of ‘America First’ policy bingo, we’ve had talk of trade, tariffs, geopolitics, national security – and so it was only a matter of time before President Trump criticised major trading partners for devaluing their currencies.

Key Quotes

“In the usual policy-by-Twitter fashion, the President called out China and Russia for ‘playing the currency devaluation game’ as the US raises its interest rates – implying that both countries have been actively keeping their currencies lower during the Fed’s current policy normalisation cycle. While the facts somewhat disagree with this – with both RUB and CNY currently at stronger levels against the USD relative to when the Fed began raising interest rates in Dec 2015 – one should not be too surprised by the President’s tweet.”

“As we’ve argued before, such mercantilist rhetoric implicitly highlights the current US administration’s desire for a weaker US dollar – and we believe such expectations will remain entrenched in FX markets until credibly broken. What may be more unnerving is the specific focus on both China and Russia – which given recent trade and geopolitical developments, only risks fuelling the current global tensions. Moreover, taking trade and geopolitical ‘wars’ into the currency space has often proven to be a toxic outcome for global markets; history shows how US officials talking down the dollar can escalate into a ‘Sell America’ bias – with a coordinated sell-off in US assets (including US stocks) weighing on global risk sentiment. While the market reaction hasn’t quite been as detrimental, it’s no surprise to see the USD trading on a weaker footing against currencies which run large external surpluses – for example the EUR, JPY and KRW (CNY to some extent as well).”

“We expect this theme to remain in place as these currencies will broadly make up President Trump’s ‘FX watchlist’ over the coming year. BBDXY index to test its cyclical lows – with risks of a decline to 1100 in the near-term.”