This weekend saw Trump restarting the trade war rhetoric by threatening to put 50% tariff on EU and also 25% on all Apple imports in to US from other countries. This behaviour is a repeated sign of using extreme rhetoric to start with and then settle down at a higher level then pre-Trump era. We saw this in case of China recently where he went to the extreme of 145% and then now has settled at 30%. The reaction of FX to these weekend events was along expected lines. Markets discounted his threats by the close of Friday session. In short term Trump’s 50% tariff threat on the EU may only lead to a temporary bid in the USD because markets may not expect this high tariff level to last (if implemented at all), because it could accelerate trade discussions, and because Trump’s unpredictable policies may only add to underlying weaker USD factors over the medium-term. The other major focus for the weaker USD is fiscal concerns which is gaining momentum by the day. In DM FX, we like long JPY and AUD against USD. In EM FX, we like CNH and INR against USD. Our in-house month-end rebalancing model indicates a moderate dollar-selling signal against all majors by month-end. Our fav pair to play this trade is again AUD & JPY. DXY is currently at 99.11 and is likely to trend down to 98 levels by may end. We might possibly see 95 levels by June end itself. AUD and JPY are likely to be the largest winners in this round of DXY weakness. Our view flows from the fact that Trump chaos is likely to continue leading to incremental flows rerouted to non-US DMs specifically EU and Japan. Even Asian FX like KRW/JPY/CNH/INR might see appreciation of 1-2% by June end against DXY as global savings reroute towards EMs. The “SELL US” trade is only beginning & will be likely to not get over shortly as long as current US policy confusion continues.
