The US-China trade war has dominated headlines for the past two years. The two economic powerhouses have been in a bitter dispute over tariffs and trade policies, leading to a significant impact on the global economy. However, the recent US-China trade truce has brought some relief to the markets, including the forex market. In this article, we will explore how the US-China trade truce affects forex.
Background
The US-China trade war began in 2018 when the US imposed tariffs on Chinese goods, citing unfair trade practices, such as intellectual property theft and forced technology transfers. China retaliated with tariffs of its own, leading to a tit-for-tat trade war that has impacted global economies. The trade war has led to a slowdown in global trade, with businesses and consumers facing higher prices for goods and services.
The US-China trade truce
In December 2019, the US and China reached a partial trade deal, signaling a truce in the ongoing trade war. The deal, known as the Phase One trade deal, includes commitments from China to purchase more US goods and services, including agricultural products, energy, and manufactured goods. In return, the US agreed to reduce some of the tariffs imposed on Chinese goods.
Impact on forex
The US-China trade truce has had a significant impact on the forex market. Here are some of the ways it has affected forex trading:
1. Strengthening of the Chinese yuan
The Chinese yuan has been under pressure due to the trade war, with investors worried about the impact of tariffs on the Chinese economy. However, the US-China trade truce has led to a strengthening of the yuan, as investors become more optimistic about the Chinese economy. This has led to a decrease in the value of the US dollar against the yuan, making Chinese goods cheaper for US consumers.
2. Boost in risk appetite
The US-China trade truce has also boosted risk appetite in the markets. Investors have become more optimistic about the global economy, leading to an increase in demand for riskier assets such as stocks and commodities. This has led to a decrease in demand for safe-haven currencies such as the US dollar, Japanese yen, and Swiss franc.
3. Impact on emerging market currencies
Emerging market currencies have been under pressure due to the trade war, with investors worried about the impact of tariffs on these economies. However, the US-China trade truce has led to a boost in emerging market currencies, as investors become more optimistic about the global economy. This has led to an increase in demand for currencies such as the Brazilian real, South African rand, and Indian rupee.
4. Impact on commodity currencies
Commodity currencies, such as the Australian dollar, Canadian dollar, and New Zealand dollar, have also been impacted by the trade war. These currencies are highly correlated with commodity prices, which have been affected by the trade war. However, the US-China trade truce has led to an increase in demand for commodities, leading to a boost in commodity currencies.
Conclusion
The US-China trade truce has brought some relief to the markets, including the forex market. The truce has led to a strengthening of the Chinese yuan, a boost in risk appetite, and an increase in demand for emerging market and commodity currencies. However, the impact of the trade war on the global economy is far from over, and it remains to be seen whether the Phase One trade deal will lead to a lasting resolution of the dispute.
