Filled with risk! The international situation is uncertain [Jiro Ota]
Profile of Jiro Ota
Ota Jiro. FX strategist. Began FX trading in 1979 at The First National Bank of Boston Tokyo Branch. Later worked in corporate FX trading at Manufacturers Hanover Trust Bank, BHF Bank, National Westminster Bank, and ING Bank, then engaged in retail FX, operated at GFT Tokyo as a sales executive, later gaining experience as a market strategist, and is currently active as an individual investor.
*This article is a reprint and editing of an article from FX Crossing攻略.com December 2018 issue. Please note that the market information written in the text may differ from current market conditions.
Clash of the US midterm elections → Early indications show the Democrats are ahead
Only a short time left until the November 6 US midterm elections. A September 24 Wall Street Journal report cites a joint poll by WSJ and NBC News showing 52% of registered voters favor a Democratically led Congress and 40% for a Republican-led one, widening the Democratic lead to the largest since President Trump took office in January 2017.
Meanwhile, President Trump’s approval rating remains steady at 44.0%, and 69% of voters say they are satisfied with the economy, up from 63% the previous month, suggesting that Trump’s economic policies are being supported.
The races in this midterm include all 435 seats in the House, 35 of the 100 Senate seats, and 36 state governor positions across 50 states. For the Democrats to secure a congressional majority and check Trump’s policy implementation, they would need to hold 23 House seats and 2 Senate seats. Depending on the outcome, there could be changes in Trump’s assertive policy execution, which would also be significant for currency markets.
Escalation of US-China trade war → who will be the winner?
The International Monetary Fund (IMF) projects that US-China sanctions and retaliatory tariffs will reduce growth in both economies by 0.9 percentage points. The global economy is currently growing steadily, but the trade war could continue for a long time until one side earns a victory, and not only the US and China but also the US and the European Union (EU) and the US and Japan, pose risks of becoming more severe for the world economy.
Nevertheless, Trump can also be seen as implementing the pledges he made during the presidential campaign. He argued in his platform to label China as a currency manipulator for keeping the yuan artificially low and impose a 45% tariff on imports as a countermeasure. He also stated he would withdraw from NAFTA unless terms favorable to the US were agreed, and announced withdrawal from TPP.
Here, let us review the latest moves in US-China sanctions and retaliatory tariffs.
◎ July 6, the US imposed a 25% tariff on approximately $34 billion of imports as the first tranche of sanctions for Chinese IP infringement (China retaliated with tariffs on about $34 billion of imports the same day).
◎ August 23, the US imposed a 25% tariff on approximately $16 billion of imports as the second tranche of sanctions for Chinese IP infringement (China retaliated with tariffs on about $16 billion of imports the same day).
◎ September 24, the US imposed a 10% tariff on approximately $200 billion of imports as the third tranche of sanctions for Chinese IP infringement (China retaliated with tariffs on about $60 billion of imports the same day).
The total of the first to third tranche sanctions is about $250 billion, roughly half of China’s imports of about $500 billion. President Trump has publicly stated that he would raise the rate to 25% by year-end and indicated a readiness to implement a fourth tranche of tariffs totaling $2670 billion depending on China’s response. If implemented, the US would impose tariffs on all imports from China, provoking inevitable Chinese retaliation and posing a more severe impact on the world economy.
