China Trade War Now Post 2020 So Focus on Currency War

President Trump is not likely going to get a trade deal with China before the next election. He basically told us that on Friday, and it’s confirmed my market chatter today. What’s plan B? Currency wars. In studying the 1987 stock market crash, there we are few main ingredients that set the stage. The US and Germany were embattled in a disagreement over the level of the Deutschemark and German auto sales. Sound familiar?

Now don’t go out and sell everything because Berman suggested that risks are similar to the 1987 scenario, because markets continue to melt up and make new highs—or do they. Really, it’s only a handful of large cap tech stocks that are lifting the averages, most stocks globally are well below their 52-week highs and not even 2/3rds are above their own 200-day averages.

The market is betting heavily that we get a soft landing engineered by the FOMC. Morgan Stanley predicts that 21 of 34 central banks they follow will have cut rates by yearend (including the BoC). So what the Fed says this week and specifically how they say it will go a long way to set the narrative for the market.

But when it comes to currency wars to influence trade policy, you are impacting massive potential flows. For example, a stronger Japanese yen is typically a risk off indicator. The Japanese govt cut their 2019 GDP forecast to 0.9% from 1.3% last night. Toss in BREXIT (GBP) issues heating up in the coming months and the VIX index back at very complacent levels with the traditionally volatile Q3 period for equity markets and you have to think that if you have not taken money off the table, perhaps you should think about how to play a bit more defence.

The EURJPY cross rate is often a great indicator of market risk. A stronger yen versus euro portends more equity volatility. A weaker dollar is what the Trump administration wants and there is money to be made in currency exposures during difficult periods for equity markets. We like the yen as the best exposure. Not Japanese stocks and not Japanese bonds, but the yen. The best ETF to get this exposure is FXY.


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