The lack of progress in reaching trade deals is starting to worry markets. One of the ways that traders are trying to get ahead of the situation is taking long positions in Asian (and Oceania) currencies. At least, according to a recent survey conducted by Reuters of how forex traders are preparing for the contingency.
The move has a good deal of fundamental logic behind it. The potential outcomes of the trade negotiations could create a win or win situation for certain currencies. Although, these are what some might consider rather exotic trading strategies. But, analyzing the thinking behind these kinds of moves can give us some better insight into the broader markets as well.
The Ticking Trade Time Bomb
Since the start of April when the massive reciprocal tariffs went into effect, only one country has reached a “deal” on trade. That’s the UK. But the UK has a special relationship with the US, and in particular America doesn’t run a trade deficit with Britain. And we are now more than two months into the three month moratorium on the biggest of tariffs. So, it’s understandable that traders are getting a bit nervous about the clock running out.
There has been a lot of focus on the recent trade negotiations between the US and China. The hope is that it could set some kind of blueprint for other trade deals that might be reached in a quick succession before the deadline early next month. China is one of the harder nuts to crack on trade, since it has the largest trade surplus with the US. Twice high-level officials have met, but have done little more than to essentially kick the can down the road. So, what happens if a deal is or isn’t met?
Why Asian Currencies?
If the US gets a deal, this is expected to give the dollar a boost. The greenback has lost around 9% since the start of the year, mostly on trade concerns. This would likely hurt most of the other currencies it trades with, as it would cause a reverse in the gains that major currencies like the Euro have experienced recently.
But, reaching a trade deal would also be supportive to the countries that do a lot of commerce with the US. Those are mainly Asian countries. For this reason, there has been a lot of interest in taking long positions on the Chinese yuan and the Hong Kong dollar. By extension, a rise in Chinese demand would likely also help the Aussie dollar. This could counteract the gain in the dollar if a trade deal is made.
But What If Deals Don’t Materialize?
A continuation of the uncertainty would likely come at the cost of the dollar. This weaker dollar would also translate into gains in other currencies, including the Asian ones. Investors would keep looking for alternative safe havens to the dollar, which puts the yen into pole position. And a normalization of the current situation would mean that Asian exporters would adjust, target new markets, and that would allow their currencies to recover.
This situation explains why many traders might believe that a deal would help boost Asian currencies, and a no deal would also support them. Of course there are risks to that position, namely a re-upping of tariffs in a last-ditch effort to force a trade deal. This could occasion a drop in Asian currencies, at least in the short term.
