Currency War Fears Grow As Yuan Hits 12mth Low Following Trump Talking Down The Dollar

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Trade War

While the main market focus over recent months has been on trade wars, fears have been building this week over potential currency wars following comments by President Trump. Speaking with CNBC, the President commented that he feels the Fed is undermining his efforts to strengthen the US economy by raising interest rates. When asked whether he was comfortable with the Fed’s current tightening the President said “I don’t really – I am not happy about it” adding “I don’t like all of this work that was putting into the economy and then I see rates going up”.  Commenting on the new Fed chairman specifically, Trump said that he is a “very good man” though added that he “wasn’t thrilled” about the prospect of further rate hikes.

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PBoC Lets Yuan Slide

Fears of a currency war are coming into focus as the PBoC let the Chinese Yuan fall to one year low, drawing criticism from Trump who said the central bank was letting the Yuan fall “like a rock”.  Commenting on the move, Jasper Lawler of London Capital Group said: “Interpreted as China’s response to the US trade war – the starting of a currency war- risk off is prevailing with traders selling out of equities sending Asian markets and European futures sharply lower. It was only a month ago when China denied that they would start a currency war following Trump’s action. A lot can change in a month under Trump.”

Trump’s Comments Follow Those Of US Treasury Secretary

This is not the first time the President has commented on the movement of the Fed or the US Dollar and has come under attack before for tweeting his views on the US Dollar. Trump was quick to talk the US Dollar down following the rally that took place over the course of his election campaign and given the strength of the US Dollar over this year so far, the timing is unsurprising. These comments come after Treasury secretary Mnuchin commented in January about the need for a “weak US Dollar”.

Following Mnuchin’s comments in January, The US Dollar fell around 5% over the first few following weeks.  The US Dollar was similarly shunted lower in response to Trump’s comments though it seems the decline was stemmed as the White House released a statement playing down the President’s comments saying that Trump respected the independence of the Fed.

However, it seems that the US Dollar rally had already run out of steam prior to the President’s comments so there is the potential for a medium-term top to form here. The increase in trade war escalation has favored the US Dollar recently as markets have viewed it as a USD positive. However, in the absence of any further escalation in the trade conflict between the US and China or Europe, it seems likely that the Dollar can see some pullback from here.

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Trump Under Fire Again

Trump has come under immediate attack from critics who are keen to highlight the need for central bank policymakers to be independent of political bias. Trump’s comments are not out of place as the President is already being lambasted for his comments made during a press conference with Russian President Vladimir Putin where he said that he believed Putin’s denial of any Russian involvement in the US elections in 2016. Following Trump’s comments, the President then caused further outrage as he tried to backpedal on the comments saying that he had misspoken during the press conference and had meant to say that he saw no reason why Russia wouldn’t be involved.

In all, this has been another week of controversy and blunders for the US President. While the market reaction has for now been muted, the medium term effects are yet to be seen. Alongside this, the response of the electorate will be important as we continue to move closer to the November mid-term elections.

Technical Perspective

For now, the pause in USD keeps the potential inverse head and shoulders pattern in play. If USD moves lower from here, traders should watch the 91.00 level as a potential right shoulder base which could set up a larger rally higher.

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.

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