The response seen in recent months in the foreign exchange markets to the escalation in the trade conflict between the two economic major powers followed a well-known pattern. The currencies considered safe havens, namely the US Dollar, the Japanese Yen and the Swiss Franc, all gained ground while currencies in the emerging markets came under selling pressure. Since the middle of July however, there has been doubting that this pattern will unconditionally apply in the future, at least as regards the Franc and the Yen.
An increase in political uncertainty in Euroland causes the Franc to gain on the Euro. This was most recently demonstrated once again by the confusion surrounding the formation of a new government in Italy. It became clear at the latest the week before last that this “law” must not necessarily apply to an escalation in the trade dispute between the USA and China. Thus, the US administration recently announced it was preparing new, extensive customs tariffs on imports from the world’s second-largest economy and in so doing, as expected, triggered the threat of counter-measures by the Chinese. Bucking the usual response pattern, the Franc did not manage to exploit the scenario and in fact actually lost a little ground on the Euro. The same is true of the Yen. Instead of gaining in value in the customary manner on the back of increasing tension, the Yen in fact increasingly came under selling pressure compared to the US Dollar.
This price response makes sense above all if the focus is on the economic aspects of a trade war between China and the USA. In the past, fundamental arguments have in times of crisis only been a subordinate factor for both the Yen and the Franc, not to say played no role at all. Given the sheer scale of the threatened trade obstacles now being mooted, and the increasing escalation dynamic, it should come as no surprise if the potential economic impact plays a more important part on the foreign exchange markets.