Donald Trump’s protectionism became the main driver of Forex fluctuations
Theory is useless without practice. Fundamental analysis asserts that currency rates are influenced by various factors: economic, political, ecological, etc. . I doubt whether we could fully estimate the impact of politics on Forex but for Trump’s protectionism. In 2018-2019, trade wars become the main driver of USD pairs’ fluctuations.
When the White House introduced tariffs on $300 billion worth of Chinese imports in spring 2018 and thus began a trade war, Bloomberg experts thought it would be a bullish factor for the US dollar. First, the trade balance deficit was supposed to reduce, which is good news for the national currency. Second, the tariffs were to raise producer prices. Higher inflation intensifies a risk of Fed’s monetary policy tightening, which is a boon for the greenback. The USD index did grow 9% in 19 months, but for completely different reasons.
The trade wars created some uncertainty, which made corporations reduce their business investments and thus led to a slowdown in business activity and GDP. Producers had to lower prices because of a cut in global demand. As a result, inflation started slowing down instead of accelerating and central banks thought it was necessary to loosen monetary policy. The world saw a wave of extremely low, often negative, credit and bond rates, which devalued the USD’s competitor currencies. As a result, the greenback grew not because of the reduction in the trade balance deficit and Fed’s restrictive monetary policy, but because of other global currencies’ weakness.
Dynamics of US and China producer prices
Source: Trading Economics.
Open economies where the export’s share in GDP was quite significant, suffered the most from the trade wars. For example, this value amounts to 44% in Germany, and the eurozone’s largest economy almost fell into recession because of a slowdown in foreign demand, a cut in business investments and a business activity fall, mostly in the manufacturing sector. The currency block’s slowdown in GDP and inflation forced the ECB to announce in September 2019 that the QE program would be relaunched, which was a bearish factor for EUR/USD.
GDP and business activity dynamics in Germany
Source: Trading Economics.
Along with the competitors’ weakness, the USD was supported with an inflow of portfolio investments in the USA. The American economy was resistant to outside negative factors, also because of the large monetary stimulus. On the contrary, Chinese GDP growth rates fell to their lowest over a few decades. As a consequence, the divergence in the stock indexes’ dynamics led to a capital flow to the USA and raised demand for the dollar. It was so high that the Fed was obliged to restart REPO in autumn 2019 in order to end crisis in the currency market.
Dow Jones and Shanghai Composite evolution
Source: Trading Economics.
The theory of fundamental analysis says that however important political factors may be, their impact on the Forex rates is temporary. It may be limited to almost 2 years, like in case of the trade war, or almost 4 years, like with Brexit. However, just like a “deal” Brexit is likely to consolidate the pound, the end of the US-China trade conflict will contribute to a recovery of Germany’s and the eurozone’s economies and investors’ rising interest in Euro.
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Price chart of EURUSD in real time mode
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