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Jane Foley, Senior FX Strategist at Rabobank, explains that after the recent escalation in the China/US trade war, it could be some time before the full impact of trade wars is seen in the data and this could mean that investors currently risk being lulled into a false sense of security.

Key Quotes

“Another factor that has reassured EM investors this month is the comment from Chinese Premier Li that China will not weaken the CNY in order to boost exports. The will have appeased investors in countries that export into China as well as those that are in competition.   China owns a lot of overseas assets including US treasuries, so supporting the value of the CNY protects its investments.”

“In addition, China is attempting to increase its influence on the world stage and a strong and stable currency would be beneficial to this end.   That said, slower growth and increased policy accommodation still suggests that the CNY is likely weaken over the medium-term.”

“It is our view that weakened growth in China will not only be a drag on the value of the CNY vs. the USD in the months ahead, but that it will remain a constraint on risk appetite for some time. This is likely to be to the detriment to EM assets.”

“In contrast, strong growth and higher yields in the US are likely to continue supporting broad-based USD.   We see scope for addition gains for the USD vs. the EUR into the middle of next year, with the EUR likely ended 2019 higher assuming the ECB starts to tighten policy in H2 next year.”