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Tariffs Weigh Down the Market Pressing Many Currencies in the Process

Tariffs Weigh Down the Market Pressing Many Currencies in the Process

Published: January 20th, 2020

– On Wednesday, January 15, President Donald Trump and Chinese Vice Premier Liu He signed phase one of the U.S.-China trade deal. The agreement commits China to increase its imports from America by some $200 billion over the next couple of years. In exchange, the U.S. will slash tariffs from 15% to 7.5% on some $120 billion worth of Chinese goods and services. Despite all these snippets of “good news,” the general market mood is not upbeat…

Following the new trade deal signed between the U.S. and China, America seems to be the apparent winner. Washington negotiated a deal that will see the U.S. maintain almost all the tariffs it slapped on China. This new arrangement extends to November when the U.S. goes to the ballot.

The news has not helped elevate the mood in the market. Instead, situations worsened because of a general feeling that the articles of the deal may not helpful to the global economy. Besides, the U.S. administration is still keen on tightening pressure on the Chinese tech giant Huawei. These sentiments contradict the overall upbeat mood of the markets over the past few weeks.

Traders hoped that a trade deal between the two economic superpowers would bring some element of certainty to the global trade arena. It now emerges that the items of the deal are one-sided and, as such, not sustainable.

Incidentally, the complaints are coming not only from the markets but from other trade partners. According to the European Union trade commissioner Phil Hogan, the Sino-U.S. trade deal is a political statement rather than an economic one.

Terms of the Trade Deal

According to the EU diplomat, the deal offers little economic benefit. He adds that the entire terms proposed by the U.S. president only seem designed to get him re-elected. Hogan says that both sides have kept the 20% tariffs they levied on each other. This situation, he contends, does not improve the competitiveness of the two economies, neither does it increase job opportunities.

According to the trade commissioner, these facts make the deal superficial. He contends that Trump’s key objectives are the competitiveness of the U.S. economy and the employability of the American workers. Hogan feels that the deal as currently constituted cannot help achieve these two goals.

This school of thought, however, contradicts the beliefs that the Trump administration holds regarding the agreement. Speaking soon after the signing, President Trump said that his administration had taken a momentous step never travelled attempted before with China. He added that the deal was a move towards a future that is characterized by fair and reciprocal commerce.

Saying that the trade deal rights the wrongs of the past, Trump added that it will help deliver a future laden with economic justice, security for workers in America, and guaranteed markets for farmers. The president also said that China also stands to gain. He added that the deal holds a lot more benefits than its $200 billion face value.

Disconcerting Voices

Unlike Donald Trump, many quarters are not enthusiastic about the agreement. Vishnu Varathan, a top executive of Mizuho Bank in charge of economics and strategy says that the only positive aspect of trade deal is the certainty it brings around the U.S.-China trade relations.

According to him, the Trump administration only took steps to root out the practices by Beijing that the U.S. considered unethical. Key among these, he says, include theft of intellectual property and coercing U.S. firms to transfer technology before they can access Chinese markets.

Vishnu says that the deal is only tentative. He adds that this agreement does not define a starting point, and neither is it a lasting solution. He adds that the whole agreement raises more questions especially concerning the monitoring process and the compliance mechanisms. The fact that the agreement provides for remedial measures especially in a proprietary manner, he adds, only serves to remind both parties that risks associated with regressing should not be downplayed.

Currency Market Reactions

The dollar reacted by trading at 97.226 against a horde of currencies, which is a dash below its position at the close of business on Tuesday. The off-shore yuan, on the other hand, rose a notch to stand at 6.8912 from an earlier position of 6.8800.

The markets expected both the off-shore yuan and the dollar to move substantially but the currencies ended up closing the day with just “modest reactions.”

Richard Grace, the head of international economics and chief currency strategist at the Commonwealth Bank of Australia said that the Sino-U.S. trade deal has short to medium-term significance or influence. She thinks this influence will push both the off-shore yuan and the dollar up.

Aside from the two currencies, the Japanese yen slumped, trading at 109.97against the greenback. The previous week, the Japanese currency closed at 109.60. Conversely, the Aussie was on an upward trajectory, rising from an earlier low position of $0.6899 to close the day at $0.6904.

Securities Markets Jump

Unlike the currency markets, which recorded mixed reactions, the vast majority of the securities markets in Asia responded well to the news of the deal by gaining more points. Nikkei 225 rose to 23,933.13 as did South Korea’s Kospi index, which picked 0.77% gains to stand at 2,248.05. Kospi’s rise is attributed to the gains made by Samsung Electronics and Hyundai Motors that advanced 2.88% and 3.04% respectively.

The Hang Seng index of Hong Kong also rose 0.11%. However, the Topix index and the Shanghai Composite slumped. The former shed a few points to stand at 1,728.72 while the latter shrugged off 0.52% to stand at 3,074.08. The Shenzhen Composite did not move.

In Summary

China and the U.S. took a bold step to sign the trade deal that they have haggled over for almost two years now. Pundits believe that the agreement will bring certainty in the global trade environment. Reactions from the same markets, however, do not quite agree with this statement, at least not just yet. As a result, many currencies remain pressed following pressure from the markets. Whether this situation will change soon remains to be seen.