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As investors around the world wrestle with the latest twists and turns of President Donald Trump's trade war, experts are beginning to cry over another battle that is taking place beneath the surface.
Called the "currency war", the situation worsens as market experts fear the worst as the world's superpowers try to lower their currencies to the detriment of their opponents or the countries with which they are supposed to work to balance their economy. .
The rationale is: a weaker currency makes exports more profitable. For countries like the United States and China – it's no coincidence – the two main fighters here – it's a crucial variable to take over in the trade war that has been going on for months.
The problem of such a conflict is that it represents the breakdown of the kind of cooperation that keeps world markets in harmony. As the tension rises and combative measures multiply, it can have a negative effect on everything from stocks to commodities and currency.
So, how did we get to this crucial market hub? First, the recent precipitous decline of the Chinese yuan has attracted attention. The currency, fresh out of its largest monthly decline ever against the US dollar, hit a trough of more than a year against the greenback last week.
And, like many ongoing world conflicts, Trump played a major role. In a pair of tweets last Friday, the president accused China and the European Union of "manipulating" their currencies, which he said eroded "the "Competitive advantage" of America.
His comments were echoed by Steve Mnuchin last Friday. In an interview with Reuters, the US Treasury Secretary said: "There is no doubt that the weakening of the currency creates an unfair advantage for them." He added that his colleagues "will carefully consider" the implicit handling.
With drawn lines of battle, a new currency war was born. "It is now virtually defined as a currency war by the US president, since it has explicitly suggested that foreign countries are manipulating exchange rates for competitive purposes," Shahab Jalinoos, global account manager, told Bloomberg. Credit Suisse currency strategies. the week.
Craig Nicol, a macro strategist at Deutsche Bank, agrees.
"What started as a war on trade now seems to have taken on new roots with the seeds of a potential currency war now apparently sown and threatening to burst," he said. declared Monday. "We may see last week as a turning point for the markets."
A precedent suggests that the road could be difficult
Perhaps the closest Previously we have seen the devaluation of China's shock in 2015. While China does not seem to ingest directly in its currency this time, this instance provides a valid model for the kind of widespread market damage. which could be inflicted if the nation becomes more pointed in its strands.
In short, it will not be pretty. The surprising devaluation caused a contagion of the global market, including a correction of the benchmark S & P 500 – defined as a drop of 10% or more.
Fortunately for risky asset holders, Wall Street experts do not see the time to get there, at least for the moment. Richard Turnill, chief investment strategist at BlackRock, said China should rely heavily on fiscal and monetary tools to spur growth this time, rather than lower its currency further.
"Today, China has put in place stricter capital controls – and improved coordination among policymakers," he said on Monday.
Paul Kitney, chief equity strategist for Asia-Pacific at Daiwa Capital Markets, is skeptical that China will arm its currency in a context of increasing trade tensions.
"We do not find any evidence that the Chinese are using the RMB as a political tool," he said in a note to clients.
In the end, it is quite possible that Trump himself would use incendiary rhetoric in an attempt to depreciate the dollar – something that would improve the prospects for US exports and help his efforts on the war front. commercial.
Although this interpretation was strongly denied by Mnuchin in his interview with Reuters on Friday, it can not be denied that the currency war, in its current state, seems to be one-sided – at least in terms of public comment.
But that does not mean that it can not be damaging to global markets, which is why investors would do well to consider the situation with caution.
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