Bill Poulos discusses the impact of the trade war tariffs on the foreign exchange market and why people trade with their emotions. Read reviews on Profits Run and Bill Poulos here.
The ongoing trade war between the US and China managed to roil markets earlier this week which is a little ironic in a way. When the US announced higher tariffs on Chinese imports the market took notice and when China announced their plans to retaliate things really went south. The market’s reaction is a great example of just how emotional traders and investors really are. The tariffs don’t amount to much at all in fact relative to the GNP of the US economy they are barely a rounding error. When the current administration announced their Federal tax cut some people complained and now that new tariffs are being levied, which are really nothing more than a small increase in Federal taxes, many of the same people are complaining about that too. I believe that one of the main reasons that the markets were affected, especially the stock market, is because it gave traders an excuse to exit their positions and to book their profits. The market was at or near all time highs; in that situation it’s tough to get out because what if it goes higher, while at the same time, it’s tough to stay in because what if there’s a pullback and I give up some of my unrealized gain, the old adage that the market climbs a wall of worry is very true. The tariffs were the catalyst that made this decision easy. The increase in tariffs from 10% to 25% on $200 billion worth of Chinese goods amounted to a tax increase of about $30 billion, the total amount we all paid in taxes last year at the federal, state and local level was $5.51 trillion, the increase is barely .5%.
The USD gained back what it lost to the EUR last week and is now at the bottom end of the trading range that the pair has been in for the last few weeks. It should be interesting to see if the USD will have the strength to follow through and break that range to the down side. The USD also held up well against just about all of its trading partners but it really made the GBP and AUD pay this week pummeling both of them, it took advantage of the GBP by more than 3 big numbers.
The dominant news story in the UK, once again, is the Brexit deal or the lack thereof. The Prime Minister announced that there will be a fourth vote around Brexit proposals this June after already suffering 3 previous losses; she said that there won’t be a fifth vote. She has until the end of October to secure a deal but an earlier vote will mean that the UK can give up their seats in the European Parliament and will not have to attend the July meetings preparing for their exit.
The GBP held up well against the AUD but as mentioned above the it was destroyed by the USD and it had about the same result versus the JPY, CAD and EUR, it lost only slightly less to the NZD
The EUR lost early to the JPY but stabilized, the USD and CAD took advantage over it while it gained against the NZD and AUD.