On Monday the 17th of September, trading on the euro closed up. The rate recovered to 1.1669 (67 degrees). I reckon that the pair’s growth was triggered by the pound, which rose to 1.3164 against the greenback. The pound got some support following reports that progress is being made in the Irish border talks.
Day’s news (GMT+3):
15:30 Canada: manufacturing shipments (Jul).
17:00 US: NAHB housing market index (Sep).
23:00 US: net long-term TIC flows (Jul).
23:30 US: API weekly crude oil stocks (14 Sep).
Fig 1. EURUSD hourly chart.
Current situation:
The rate jumped by 67 degrees. Monday moved against Friday. Since a rebound from the trend line did not occur, I reckon that the pair is following my forecast from the 4-hour timeframe. I haven’t removed my hourly forecast from the chart because of the ongoing trade wars. I’ve also included an intraday forecast for Tuesday, so I hope this doesn’t confuse anyone.
In Asia, the euro bulls have revisited yesterday’s high (1.1665). The pair is currently trading at 1.1716. The economic calendar is pretty bare, so after yesterday’s session rally, I concluded that today we should see a correction to 1.1662. This is a necessary, but insufficient for my weekly scenario to work out. It’s important that the rate doesn’t drop too far, or it could easily turn into my scenario from the hourly timeframe. Let’s wait and see what kind of comments come out of China today in response to the proposed new tariffs. There’s a resistance at 1.1722, beyond which the road is open to 1.1740.
There’s an EU leaders’ summit taking place this week, where negotiations with the UK will continue. These talks will be important for the pound. If there isn’t any negative news, the pound won’t drop, and this shouldn’t have any negative effects on the euro.
Stock markets in the US opened on Monday around the same level as Friday’s close, which marked a week of gains recovering the losses of the previous week. The S&P500 closed at 2905, up 1.21% on the previous week, the DJIA at 26155 (+0.94%), and the NASDAQ at 8010 (+1.39%) in a week in which Apple presented its new products in a presentation that disappointed some analysts. There are renewed threats of sanctions from the US against Chinese imports, with China threatening to stop any further trade talks in the event of new sanctions. This is bad news for global trade and, possibly, for global demand, yet stock markets rose on the belief that the tariffs are being used more as a negotiation tool than as a weapon to unleash a full-blown trade war.
Furthermore, economic and corporate data in the US continue to be consistent with further value creation, the record growth of the stock market notwithstanding.
In this situation, the S&P500 approached its all-time high once again:
After touching the all-time high area, the price has now rebounded downwards and currently seems to be aiming for a new test of the support at 2880 as it trades below 2900 again.
Should this test happen, we could spot a double top formation, which would confirm the divergence we see forming on the indicators.
At that point, the closest dynamic support would be key for the index to start rising again or head to a possible test of the support at 2800-2790.
So far, the index has managed to shake off all the bad news coming from the geopolitical and economic spheres, but a slight loss of momentum seems evident.
Moreover, if we take a look at the NASDAQ, the hypothesis of a correction seems more probable:
The chart shows the index trading below both the static and dynamic supports. A short position here would be possible for the most aggressive trades with a first target of 7200-7195 points. Those seeking confirmation might want to wait for a break below 7380.
With the stop to be placed above the all-time high, the size of the position must take into consideration over 200 points and be calculated accordingly.
Should the trade be successful, the second target would be at 7000 points.
Now let’s take a look at the short trade we took on the DAX, which we’ve been following over the last three weeks:
The first movement brought us to close half of our position at 11900 points, keeping the other half with a stop right above the 38.2% Fibonacci retracement.
The Fibo level seems to be holding up and could push the index back towards 12000 and beyond.
On the macro side, Draghi’s statement following the ECB interest rate decision announcement last week, as anticipated, was all focused on reassuring investors and the stable underlying growth of the Eurozone, despite a slowdown in growth, repeating once again that the growth rates registered in 2017 were unusually high and the current growth should not be compared with such rates. Yet, after being pressed at the Q&A session, he admitted that the underlying risks caused by trade instability, the emerging market currency crisis, and a possible rise in financial market volatility are undoubtedly present. He also noted that the political issues within the Eurozone need to be taken into consideration, even if the spill-over effect of delicate situations such as the one represented by the new government policies in Italy, has been limited.
I do believe that these statements are a bit too diplomatic, and that the threats to global demand and within the Eurozone are definitely more present than Draghi believes, or pretends to believe.
Should the situation deteriorate due to the abovementioned risks, the macro situation would confirm the bearish view on the DAX and push the index towards the real target of the movement, which is at around 11750.
A note on the EURUSD pair:
The pair has been trading within a tight 200-pip range between 1.1520 and 1.1720 since mid-August.
Even if the chart seems to show a possible rise given that it once again bounced off the lower boundary of the lateral band after a fairly fast recovery from the downward spike linked to the Turkish Lira crisis, a medium-term long trade would be confirmed only by a clear break above 1.1720 and then 1.1835.
We don’t have much high-impact news set to hit the market this week. I would just keep an eye on the UK consumer price index on Wednesday for all GBP-related pairs and on Draghi’s speech on Tuesday, even though overwhelming surprises from the ECB chair are rather unlikely.
Gold is really struggling to climb higher. Buyers had high hopes and they still have great intentions, but they just cannot increase the momentum after the bounce from the middle of August. Many traders are thinking that 1,160 USD/oz is a hard bottom and that we should not get any lower.
The correction that started on the 16th of August stopped on the first important Fibonacci level -23.6%. Bulls tried to break that area twice and both times were unsuccessful. That creates a potentially very negative situation here. To estimate what the future of Gold will be, we need to carefully observe two dynamic supports. The first is the mid-term upwards trend line (pink), and the second one is the neckline of the double top formation (orange). As long as we stay above those two, buyers can still have hope.
A bearish breakout of those supports will bring us a strong sell signal and most likely a reversal. After the bounce from Friday (additionally shaped like a head and shoulders formation), the chances for that are quite high.
On H4, gold is moving inside a correctional range after hitting 23.60% Fibo. The primary 50% impulse has been corrected, and the price may now head to 61.80 at $1,180.80. After hitting the current high at $1,214.28, the price may correct upwards to 38.20%, or $1,238.40, and 50.00%, or $1262.50.
On H1, gold is moving down, heading towards the local low at $1.187.67. Once this level gets broken out, the price is likely to go down to reach the post-correctional range of 138.20-161.80% Fibo, or $1,178.15 to $1,172.00.
USD/CHF
The USD/CHF is heading down on H4 within the midterm downtrend, approaching 50.00% Fibo, or 0.9628. After hitting the local low, the price may further go down to the post correctional extension between 138.20% and 161.80%, or 0.9596 to 0.9568, with the resistance being at the 0.9759 high.
On H1, one can watch USD/CHF downtrend in a more detailed way.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
The AUD is not changing a lot against the greenback in early September, currently trading at $0.7155. The US may announce new customs duties for Chinese goods, which may wreck the scheduled negotiations between Beijing and Washington on trading terms. If the US continue their aggressive policy, China may just refuse to talk; no one would want to talk when there’s a gun put against one’s head, after all.
What is going on now is against common sense: while some US politicians try to come to an agreement with China, Donald Trump is making every effort to complicate matters. Washington is quite interested in peaceful talks, as the Republicans are losing their power, which is bad, as the Senate elections are near.
This week, a lot of news is coming from Australia. On Tuesday, the RBA meeting minutes are due, as well as the home ask prices index. On Wednesday, the leading indicator index is being released, while the RBA quarterly report is due Thursday. Still, the Chinese news is the crucial thing for the Aussie, as China is Australia’s key trading partner.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
Since its inception, Ethereum has set out to be different. Primarily different from Bitcoin but in a number of ways. Ether (ETH) is a token that is used on the Ethereum platform, a blockchain-based crypto that is decentralized just like Bitcoin. But that is pretty much where the similarities end.
Ethereum works in a far more complex way than Bitcoin. With Gas being used on the system to prevent spam transactions and a separate system known as the Merkle Patricia Tree regulating values on the blockchain, it is safe to say Ethereum is far more advanced.
Ethereum Trumps Bitcoin
Here are some of the ways that Ethereum’s complicated system has outperformed Bitcoin’s.
Better Mining Returns
For those who still mine crypto rather than part with hard-earned cash to buy Ethereum from exchanges, this cryptocurrency is still an attractive mining prospect. With outputs of the token remaining consistent, it definitely beats Bitcoin for long-term mining. Bitcoin outputs halve every 4 years meaning that it becomes less lucrative the longer it is mined.
Cheaper Transactions
Anyone who uses the Bitcoin blockchain will know that transaction fees are always escalating. Currently, a Bitcoin transaction costs around $1, but that has not always been the case, as recently as December it was an eye-watering $30 per transaction on average. The Bitcoin community is currently struggling to bring fees down as well as keep it there, given the tendency for Bitcoin fees to grow with its blockchain. Ethereum, on the other hand, has a very low average fee of around $0.35 per transaction, something that has remained fairly constant over time.
Faster Transaction Times
The average transaction on the Ethereum blockchain takes 15 seconds, this is lightning speed when you compare it to Bitcoin’s snail-paced 10-minute transaction time.
In many respects, Ethereum has done what it has set out to do, it has created a viable and profitable token that is a rival to Bitcoin not only in value and market share but also in usability.
To that extent, it has innovated the crypto world and brought a breath of fresh air to the community that was until that point suffering from the clunky Bitcoin blockchain. But there are other innovative coins now on the market looking to take down Ethereum. We look at Ethereum’s top 3 contenders below.
Cryptocurrencies that are Looking to Unseat Ethereum Through Innovation
Because cryptocurrency is a new concept, there is a huge element of trial and error. Much like the bug fixes that you get updated on your apps, сrypto often needs problems ironed out. To that end, there are many newer tokens that are innovating and creating a better functioning currency for users than the old guard.
XRP
XRP currently has the third largest presence by market capitalization in the crypto world. It also has an incredibly low value, but we won’t get into the whys of that here.
Unlike Ethereum and Bitcoin, XRP has set out to conquer the real world – the world full of regulators and financial institutions. That is partly the reason that XRP moved away from the decentralized platform, having a head office and governance over how the token is used instead. This allows Ripple to strategically insert their protocol into financial institutions all over the world and gain real-world traction. If you’re looking for your next crypto token, watch this space.
Stellar Lumens
Stellar Lumens is a direct competitor to XRP and an indirect competitor to most other crypto tokens. Stellar Lumens, like XRP, is aiming to revolutionize the way banking systems operate the world over. The aim is to implement the Stellar system and bring financial freedom to the third world countries as well as faster and cheaper financial solutions to the first world ones.
Again like XRP, Stellar Lumens has had a lot of real world success and has been implemented in a few financial institutions. It would, however, be amiss to say that they have been as successful as XRP. The Ripple protocol is now implemented across many leading financial institutions worldwide.
Don’t count Stellar Lumens out yet, it has a lot to offer and XRP has had a few difficulties of late, so it could be the opportune time for Stellar Lumens to take up the mantel and move ahead in the market position.
Can These Tokens Really Beat Bitcoin and Ethereum?
This remains to be seen, currently, it is unlikely that any token will overcome Bitcoin. Bitcoin simply has too much leverage in the crypto arena to be toppled at this time. Ethereum, on the other hand, is in a more precarious position. With the likes of XRP already breathing down their neck, it could be that they are soon overtaken.
It will all come down to the battle of who will innovate the most and who will ultimately bring the most value to both the crypto world and the real world. The next year should be very interesting indeed, with many tokens jostling for the position. We could see a completely different running order this time next year.
About the Author: Mary Ann Callahan
As an expert on Bitcoin-related topics, I’ve found myself as a Journalist at Cex.io – cryptocurrency exchange. I’m working on articles related to blockchain security, bitcoin purchase guides or bitcoin regulations in different countries.
On Friday, the bearish sentiment was observed on the EUR/USD currency pair. The decrease in quotes was almost 100 points. Federal Reserve officials said about the need for further tightening of monetary policy after the meeting in September, which increased demand for the American currency. At the moment, the trading instrument has been growing. The key support and resistance levels are 1.16300 and 1.16600, respectively. We recommend opening positions from these marks.
At 12:00 (GMT+3:00), the consumer price index will be published in the Eurozone.
Indicators do not send accurate signals: the price has fixed between 50 MA and 200 MA.
The MACD histogram is in the negative zone, but above the signal line, which gives a weak signal to sell EUR/USD.
Stochastic Oscillator is located near the overbought zone, the %K line has crossed the %D line. There are no signals.
Trading recommendations
Support levels: 1.16300, 1.15900, 1.15500
Resistance levels: 1.16600, 1.17000, 1.17300
If the price fixes below 1.16300, further decline in the EUR/USD quotes is expected. The movement is tending to 1.15900-1.15700.
An alternative may be the growth of the EUR/USD currency pair to the level of 1.17000-1.17300.
The GBP/USD currency pair
Technical indicators of the currency pair:
Prev Open: 1.31061
Open: 1.30660
% chg. over the last day: -0.30
Day’s range: 1.30729 – 1.30845
52 wk range: 1.2361 – 1.4345
On Friday, the bearish sentiment was observed on the GBP/USD currency pair. The British pound weakened against contradictory news on Brexit. At the moment, the technical pattern is ambiguous. The key support and resistance levels are: 1.30600 and 1.31000, respectively. Positions should be opened from the key levels. In the near future, a technical correction is not ruled out.
The news feed on the UK economy is calm.
Indicators do not send accurate signals: the price has crossed 50 MA.
The MACD histogram is located near the 0 mark.
Stochastic Oscillator is in the neutral zone, the %K line is below the %D line, which indicates a decrease in quotes.
Trading recommendations
Support levels: 1.30600, 1.30100, 1.29500
Resistance levels: 1.31000, 1.31400
If the price fixes above the round level of 1.31000, the GBP/USD quotes are expected to rise. The movement is tending to 1.31400-1.31600.
An alternative may be the decrease of the GBP/USD currency pair to 1.30200-1.30400.
The USD/CAD currency pair
Technical indicators of the currency pair:
Prev Open: 1.29937
Open: 1.30292
% chg. over the last day: +0.27
Day’s range: 1.30297 – 1.30324
52 wk range: 1.2059 – 1.3795
On Friday, the bullish sentiment was observed on the USD/CAD currency pair. At the moment, the technical pattern is ambiguous. The trading instrument is consolidating. Financial market participants expect additional drivers. Local support and resistance levels are: 1.30200 and 1.30500, respectively. We recommend monitoring current information regarding NAFTA negotiations.
The news feed on the economy of Canada is calm.
The price has fixed between 50 MA and 200 MA, which are strong dynamic support and resistance levels.
The MACD histogram is in the positive zone, but below the signal line, which gives a weak signal to buy USD/CAD.
Stochastic Oscillator is in the neutral zone, the %K line is above the %D line, which indicates the bullish sentiment.
Trading recommendations
Support levels: 1.30200, 1.29850
Resistance levels: 1.30500, 1.30800, 1.31200
If the price fixes below the already “mirror” support of 1.30200, the USD/CAD quotes are expected to fall. The movement is tending to 1.29850-1.29500.
Alternative option. If the price fixes above 1.30500, it is necessary to look for entry points to the market to open long positions. The target movement level is 1.30800-1.31000.
The USD/JPY currency pair
Technical indicators of the currency pair:
Prev Open: 111.921
Open: 112.005
% chg. over the last day: +0.13
Day’s range: 111.855 – 111.914
52 wk range: 104.56 – 114.74
On Friday, there was a variety of trends on the USD/JPY currency pair. At the moment, the trading instrument is moving in flat. Local support and resistance levels are: 111.800 and 112.100, respectively. The positions should be opened from these marks. The trading instrument has the potential for further growth. We recommend paying attention to the US government bonds yield.
The financial markets of Japan are closed due to the holiday.
Indicators do not send accurate signals: the price is testing 50 MA.
The MACD histogram is located near the 0 mark. There are no signals at the moment.
Stochastic Oscillator has started to move out the oversold zone, the %K line is above the %D line, which gives a signal to buy USD/JPY.
Trading recommendations
Support levels: 111.800, 111.550, 111.250
Resistance levels: 112.100, 112.500
If the price fixes above the resistance level of 112.100, the USD/JPY quotes growth is expected. The movement is tending to 112.500-112.750.
Alternative option. If the price fixes below the level of 111.800, we recommend looking for entry points to the market to open short positions. The target movement level is 111.550-111.250.
The Trump administration’s ‘America First’ policies come at a critical time in the global economy. These bad policies will have adverse consequences in international trade. In the absence of countervailing forces, they could unsettle the post-2008 global recovery and undermine postwar globalization.
This summer, the Trump administration’s tariff war penalized $50 billion worth of goods traded between the US and China.
The next stage of White House escalation will impact up to $200 billion of Chinese imports, and result in proportionate Chinese retaliation.
If the White House opts to expand its tariff wars even further, collateral damage is likely to spread from goods to services and advanced technologies.
Damage Spreading from Goods to Services
Not so long ago, there was still serious talk about the US-China Bilateral Investment Treaty (BIT). Chinese foreign direct investment in the US soared to a record $46 billion in 2016, creating American jobs and injecting capital into the US economy.
Yet, last year Trump threats caused Chinese investment in the US to plunge to $29 billion, due to deleveraging in China and stringent US regulatory reviews of inbound acquisitions. After months of trade wars and asset divestitures, China’s net US direct investment was negative in the first half of the year.
Historically, advanced economies have tended to enjoy service surpluses and goods deficits in trade. US-Chinese trade is no exception. Since 2001, US services surplus with China has increased nine-fold. Last year, US goods exports to China totaled $130 billion, whereas imports from China equaled $506 billion. However, US services exports to China amount to $58 billion, while services imports from China are $17 billion. Consequently, while the US runs a goods deficit of $375 billion with China, it runs a service surplus of $38 billion.
As China exports far more goods to US than vice versa, Chinese retaliations already cover more US goods (85%) than US tariffs cover Chinese imports (50%). Consequently, the ongoing trade war is shifting from goods tariffs to non-tariff actions in services. While China has tried to avoid escalation, US battle over services trade has already begun, but with Brussels. As German Chancellor Angela Merkel has noted, it is misleading to focus on goods trade, in which the US has deficit with the EU, when the US excels in services trade, in which it has a surplus with the EU. Together with other EU leaders, Merkel is backing a “digital tax” against US multinationals including Amazon, Facebook and Google – companies that have come under fire for shifting earnings around Europe to pay lower taxes.
Trump’s tariffs have potential to undermine America’s most important competitive advantage in the postwar era: high-value, high-margin services, which range from advanced technology to pharmaceuticals. As collateral damage spreads, so will the costs. As US metropolitan centers take severe hits, the stakes will be much higher for US states, particularly California. And if trade wars continue to spread, neither Silicon Valley nor Hollywood will remain immune. Global economy does not thrive in insulated fortresses.
Chinese responses
For now, the full impact on Chinese banks and corporations is still likely to be limited. The US accounts for only 15% of China’s goods exports, and China’s domestic activity now fuels its economic growth, not its net exports as in the past. However, since there are no winners in trade wars, China, too, is beginning to feel the pain.
How is Beijing responding to the Trump tariff wars? The simple answer is that the White House has left Beijing few alternatives but to target those US export sectors that will suffer the most. In 2017, US exports to China soared to $130 billion. Only ten export groups accounted for more than half of the total, starting with civilian aircraft and engines ($16bn), soybeans ($12bn), passenger cars ($11bn), and semiconductors ($6 bn) (Figure 1).
Figure 1US Exports to China, 2017 ($ Billions)
Source: US Census Bureau
To protect its interests, China has resorted to the WTO dispute settlement mechanism but has also taken measures of equal scale and strength against US products. Current tit-for-tat responses include targeting soybeans in farm states. US agricultural exporters supported Trump’s social policies, but their livelihood relies on free trade. Meanwhile, decades of trust have diminished in a matter of months. To China, the US is just one agricultural exporter among others; to US farmers, China is the key importer. In negative scenarios, they face a permanent loss of market share in China.
Moreover, China can raise the stakes by banning the import of genetically modified products from the US, which are already opposed by many countries. China can – and has – deferred trade and investment deals that were signed during Trump’s previous visit to China. As the Trump administration is obstructing Chinese investments in the US, China could resort to tougher measures as well, including by enacting restrictions on imports of US services.
Further measures would include Chinese currency valuation, although that could undermine the ongoing internationalization of the Chinese renminbi and revive the dated “currency manipulation” debates. Far more consequential would be a Chinese move to sell part of its US Treasury bond stockpile. Things could get even worse if the relatively rapid increases of gold reserves in Russia, China, and other economies herald new challenges against the US dollar hegemony at the time that concerns over US stability are mounting worldwide.
As stakes are upped, China is running out of US imports for penalties in response to Trump’s tariff hikes. Consequently, Beijing is now putting off accepting license applications from US companies in financial services and other industries until Washington makes progress toward a settlement. That’s how the trade pain is now spreading from farmers in Iowa to US Chamber of Commerce and US business groups in China. If tariff wars prevail, the nightmares have only begun.
Despite retaliations, China continues to push for diplomatic negotiations, along with efforts to import more American cars, aircraft, and natural gas, while promoting reforms in its financial sector. Moreover, a bilateral compromise could also pave the way to new talks if Republicans lose their dominant Congressional position in this fall’s midterm elections.
Toward New Globalization?
Today, as US-led globalization by advanced economies is winding down, China-fueled globalization, which is driven by emerging and developing economies, has emerged as a complement. This is illustrated by Chinese longer-term efforts to achieve free trade in Asia Pacific, the creation of new multilateral development banks targeting the needs of emerging economies, and China-supported globalization.
While Trump favors bilateral trade talks to maximize US leverage, most nations today believe in multilateralism and regional trade negotiations. Ironically, the Trump trade war has intensified efforts at more inclusive trade in Asia Pacific. This has inspired even advanced economies in the region to take another look at trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP), which were initially designed for emerging and developing economies.
In the long run, China is pushing for the Free Trade Agreement of Asia Pacific (FTAAP), which – ironically – was initially developed in Washington, until President Obama replaced it with a geopolitical pivot to Asia and the Trans-Pacific Partnership (TPP) that excluded China.
And as ‘America First’ policies surge in Washington, the attractiveness of the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB) has significantly increased in emerging and developing economies. Yet, instead of participating in and benefiting from these initiatives, both the Obama and Trump administrations, in contrast to their trade partners and even NATO allies, have opted to remain uninvolved. Similarly, the China-led One Belt One Road (OBOR) initiative has been open for US participation, yet America has kept its distance.
The new initiatives of the Trump administration suggest that its goal may be to contain China’s economic rise, divide Asia, or both. On July 30, US Secretary of State Mike Pompeo gave a highly-anticipated speech on “America’s Indo-Pacific Economic Vision.” Pompeo announced $113 million in new US initiatives to “support foundational areas of the future” in the regional economy, energy, and infrastructure. This vision is a rehash of ideas that former Secretary of State John Kerry introduced in 2013 when the idea of the Indo-Pacific Economic Corridor was conceptualized few years ago.
The scale of the US ‘Indo-Pacific Economic Vision’ and the Marshall Plan, which Pompeo alluded to, pale in comparison with the OBOR. While there is no consensus on exact historical amounts, the Marshall Plan’s cumulative aid may have totaled $12 billion (over $100 billion in today’s dollar value.) Consequently, Trump’s much-touted Indo-Pacific Strategy represents less than 10% of the value of the Marshall Plan 70 years ago. The OBOR involves far greater cumulative investments estimated at $4 trillion to $8 trillion, depending on timelines and scenarios (Figure 2).
Figure 2Indo-Pacific Vision, Marshall Plan, and China’s OBOR
* Estimates expressed in trillions of contemporary US dollars. China’s One Belt One Road (OBOR) initiative features both maximum (OBOR, max) and minimum (OBOR, min) estimates, based on relevant literature.
Three Scenarios
It is the hope for a better future in the emerging world associated with the OBOR that remains most underestimated in Washington. What Asia really needs is a sustainable, long-term plan for accelerated economic development – not new geopolitical divisions.
Where will the current tensions lead,? At the broadest level, the outcome of the Trump tariff war can be compressed into three generic scenarios, which are defined by their strategic objectives, de facto execution, and associated economic costs.
Scenario 1: Muddling Through
The first scenario is neither a win-lose nor a win-win strategy. It does not represent postwar multilateralism, but post-Cold War unilateralism, as reflected by the FTAs that were dictated by unipolar geopolitical primacies rather than multipolar economic opportunities. It is what the Obama, Bush, and Clinton administrations relied on. In the Trump era, this scenario was initially supported by those business constituencies and voters the White House is now alienating.
As for economic consequences, with $50 billion impacted, the tariff’s impact would probably have been limited to 0.1% of Chinese and American GDP. It is a scenario that most Americans would have supported – but it wasn’t enough for the Trump administration.
Scenario 2: “America First” Protectionism
This win-lose strategy it is not Trump’s invention. After US recovery from the 1929 market crash failed and the economy drifted into the Great Depression, Congress passed the Smoot-Hawley Tariff Act. Yet, the high tariffs only worsened the Great Depression, further contributing to the international turmoil.
Currently, the stakes of the Trump tariff war against China are about to rise to $200 billion. With such elevated stakes, the collateral damage would quadruple relative to the first scenario. In China, it would shave off 0.4% of the GDP; in the US, it would likely amount to 0.8% of GDP. If the stakes increase to $500 billion, the net impact would increase 10 times from the first scenario. While China would take a hit of 1.0%, the US would suffer a net impact of 2.0% of GDP. That could unsettle key stock indexes on Wall Street and unleash substantial volatility, while disrupting the Federal Reserve’s tightening and a strong US dollar.
In the long run, the worst impact of this scenario is that it is mitigating much of the bilateral trust between Beijing and Washington, and between ordinary Chinese and Americans. It took half a century to build that trust; quantitative GDP percentage points cannot capture it.
Scenario 3: Multipolar World Trade
This is the win-win strategy. There is no reason why the United States, along with U.S. multinationals, states, and municipalities, could not cooperate with large emerging economies, including China. When Great Britain lost its leading position in the world economy, it did not respond by rejecting US-led Bretton Woods, staying out of the World Bank and the IMF, taking distance from the UN and withdrawing from international agreements, or by seeking to undermine the US dollar and to contain the rise of the US economy while seeking to divide US alliances. London understood that its future was aligned with the US and the world economy.
It is by participating in the new initiatives put forward by China and other emerging economies that US economic interests can gain an appropriate voice in their realization. Instead of projecting economic penalties, the third scenario would entail positive outcomes and spillovers. US participation in the NDB and AIIB would open new markets in Asia and the emerging world at large, just as US participation in the OBOR initiative would ensure access to other markets that Washington has long hoped to access, but peacefully, without sanctions, destabilization, and regime changes. In Asia, the renewed talks over free trade in Asia Pacific (FTAAP) could create the greatest trading sphere the world has ever seen.
Today, the third scenario feels utopian because it contradicts much of what the Trump administration stands for. But it is the only viable way to the future.
About the Author:
Dr. Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/
The original commentary was published by Georgetown Journal of International Affairs on Sept 13, 2018.
NOTES
1 Last year, California’s trade with China totaled $170 billion, covering electric cars, engines, auto parts and aluminum. Among the US states, California, which is already facing a $1.6 billion budget deficit, stands to suffer the greatest pain if Trump’s tariff wars worsen.
2 In August, the “new export order” sub-index in China’s official purchasing manager index, which is used to gauge China’s export sector’s health, fell by 0.4 points to 49.4; the lowest since the escalation of bilateral tensions with the US However, its mirror indicator; the import sub-index also moderated by 0.5 percentage point to 49.1; the lowest since mid-2016.
3 Thanks to a new thaw in Chinese-Japanese relations, the trade negotiators from 16 likely signatories of the China-supported RCEP agreed on key elements of a deal, which could result in a broad agreement by November.
4 Over a decade ago, C. Fred Bergsten, then chief of an influential US think-tank, made a forceful statement in favor of the Free Trade Area of the Asia Pacific (FTAAP).
5 Pompeo, M.R. 2018. “America’s Indo-Pacific Economic Vision” Indo-Pacific Business Forum.” US Chamber of Commerce. Washington, DC, July 30.
On Friday, the US dollar strengthened against the basket of major currencies. The US dollar index (#DX) closed in the positive zone (+0.42%). Federal Reserve officials said about the need for further tightening of monetary policy after the meeting in September. Some FOMC representatives do not exclude 4 interest rate hikes during 2019. The escalation of the trade conflict between the US and China continues. Donald Trump stated the readiness to introduce new duties on the import of Chinese goods $200 billion worth. We also recommend monitoring up-to-date information on NAFTA negotiations.
Meanwhile, a rather weak statistics on the US economy was published on Friday. The core retail sales index fell to 0.3% in August, while experts expected 0.5%. The volume of retail sales increased by 0.1%, which is lower than market expectations of 0.4%.
The British pound weakened against contradictory news on Brexit. In general, the negotiations are being proceeded successfully, but the issue regarding the Irish border is unresolved.
The “black gold” prices show positive dynamics. At the moment, futures for the WTI crude oil are testing a mark of $69.00.
Market Indicators
On Friday, there was a variety of trends on the US stock market: #SPY (+0.02%), #DIA (+0.04%), #QQQ (-0.29%).
At the moment, the 10-year US government bonds yield is at the level of 2.95-2.96%
The news feed on 17.09.2018:
At 12:00 (GMT+3:00), the consumer price index will be published in the Eurozone.
On Friday the 14th of September, trading on the EURUSD pair closed down. The greenback made gains across the board on the back of comments from Chicago Fed President Charles Evans as well as the closing of positions on risky pairs with JPY that came after news of new US sanctions against China. This brought the euro down to 1.1621.
Evans said that he wouldn’t be surprised if the Fed raises the key rate 4 times this year. President Trump has insisted on new levies on Chinese products to the tune of 200bn USD.
US data:
Michigan consumer sentiment index (Sep): 100.8 (forecast: 96.5, previous: 96.2).
Business inventories (Jul): +0.6 (forecast: +0.5%, previous: +0.1%).
Day’s news (GMT+3):
12:00 Eurozone: CPI (Aug).
13:00 Germany: German Buba monthly report.
13:15: Eurozone: ECBs Praet speech.
15:30 Canada: foreign portfolio investment in Canadian securities (Jul), Canadian portfolio investment in foreign securities (Jul).
15:30 US: NY Empire state manufacturing index (Sep).
Fig 1. EURUSD hourly chart.
Current situation:
My expectations on Friday of a drop to the balance line played out perfectly. The bulls encountered some resistance around the 135th degree at 1.1722. After a bearish engulfing, pressure on the euro increased. In the US session, the euro fell to 1.1621, marking a drop of around 90 degrees.
So, what’s in store this week?
I’m getting a rather ambiguous picture. On the hourly timeframe, cycles and patterns show the euro dropping to 1.1545 by Thursday, while the 4-hour timeframe suggests a rise to 1.1724. Maybe this will result in a sideways trend this week.
On Monday at 12:00 (GMT+3), the Eurozone will release its consumer inflation report for August. This is an important indicator for the ECB, so it’s worth paying attention to it. This could act as a trigger during the European session.
If the US imposes more import duties on Chinese goods, then there’s a good chance of our pair following my hourly scenario (red line). Since the EURUSD pair closed down on Friday, and the economic calendar is bare today, I expect quotes to rise to 1.1667.
Buying from the trend line is risky at the moment because the pair has been trading within an upwards channel for a while (6 days, 14 hours) and the hourly stochastic is in the sell zone, not the buy zone. The balance line is currently hovering just over 1.1660.
