Since the start of 2018 fears have heightened that the world could be set for a potential trade war to develop. Most of the signs that this could be the case are coming out of the USA, with signals ranging from protectionist steel and aluminium tariffs to President Trump tweeting that ‘trade wars are good’. There are other potential trade wars that could break out as well, with these having an impact on the forex market and traders in many ways.    

China and the US

The Trump administration has been threatening to impose tariffs on Chinese imports, with worries that if it does Beijing will soon retaliate and a full-on trade war will break out. Currently the US is expected to impose up to $60 billion in Chinese tariffs, covering the technology, telecommunications and intellectual property markets. History has shown that currencies do not react well to trade wars, with the Obama administration’s narrow tariffs on Chinese steel in May 2016 being reflected by the dollar index .DXY falling by two per cent in a month.

UK and the EU

Negotiations between the UK and EU over Brexit have been going on for months now and every week there seems to be fresh news regarding how they are going. Recent progress on Brexit with a loose draft offering a transition period agreed has seen the pound rally. Yet there are still further trade agreements which will need to be ironed out, both with the UK and EU, and other individual countries with the UK in the future.

Currencies Benefiting from Potential Trade Wars

When trade is under threat there are always certain safe haven currencies that experience a strengthening as those trading forex look to protect their interests. The Japanese yen has seen its position firm, while the Swiss franc is expected to rise. At the other end, it’s the USA’s main trading partners of China, Mexico and Canada that have seen their currencies fall in reaction to a potential trade war.

The General Outlook

Despite the high potential for trade wars to break out, a lot of traders still don’t seem overly convinces. Many are paying a lot of attention to developments and given the Japanese yen’s strengthening a few are making safe moves, but a lot still seem to be waiting for more action before adapting their trading strategies. The G20 could see tensions either smooth over and any potential trade war disappear, or they could grow and disrupt many currency prices.

Any potential trade war will be bad news for the currencies of nations involved, so it may be advisable to think about hedging your forex investments just in case.

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