It’s been a few rocky days in the markets, with forex pairs buffeted by the rapidly evolving trade situation between the US and China. The standout, of course, has been gold, which keeps setting record highs after record highs. But the dollar has also turned against the long-term trend. And with trade in the crosshairs, commodity currencies are feeling the effect as well.
The issue that got the market’s attention was US President Donald Trump threatening 100% tariffs on top of the already existing levies on China. He made the announcement back on Friday, causing the markets to tank and gold prices to spike. But that was just one event in a long-lasting, complicated situation that the market might not have been paying enough attention to. US-China trade relations are heading toward a crucial moment, which could mean increased volatility for markets over the next couple of weeks.
The Shock Wasn’t a Surprise
It’s important to note that the latest salvos in the trade war are occurring as the clock ticks down on the 90-day truce both agreed to as they try to negotiate a more permanent trade deal. That deal was agreed back on August 11, but analysts believe the crucial date is sooner. The Presidents of the US and China are set to meet on the sidelines of the APEC summit in Korea on October 26-27, which could be the ideal time to announce at least significant progress in reaching a trade deal.
US Treasury Secretary Scott Bessent is in China to meet Vice Premier He Lifeng, as both countries send high-level representatives across the Pacific to discuss trade. While negotiations have been ongoing, each side has initiated measures that escalate the trade war.
The Key Developments in the Trade War
Last week, the US concluded a national security investigation into Chinese shipping and resolved to impose steep fines on ships originating in China that docked in US ports. China responded by imposing penalties on US ships visiting its ports. Then China also announced a new licensing program that is intended to restrict access to rare earth metals to purely civilian applications. Initially, it appeared to be a global ban on exports of these crucial materials.
Rare earths have been a key point in trade discussions, as China controls 90% of global production, and can use it as leverage against US tariffs. Trump’s threat of 100% tariffs was in response to the potential restriction on rare-earth exports. Over the weekend, it seemed that the situation was calming down. China clarified that exports would continue, and Trump toned down his rhetoric, saying he wanted to “help” China. However, he didn’t withdraw the tariff threat.
Markets Still Shaky
Markets rebounded on Monday, but so did gold. That suggested that traders were not convinced that the situation had been resolved, and trade threats remained. That seems to be an accurate diagnosis, as late Monday, China imposed sanctions on US-based South Korean shipping companies, a sign that the trade dispute was reigniting.
As trade talks are coming down to the wire, many analysts speculate that both sides are announcing these measures to gain leverage in negotiations. Trump has repeatedly threatened to impose stiff tariffs, only to back off after securing certain concessions. With both countries apparently willing to play hardball, it might not be so surprising if further trade escalation happens ahead of the expected meeting between Trump and Xi.