Trump and Powell confrontation and current markets

Last week proved quite eventful for financial markets. More than we expected.

The Federal Reserve cut its fed funds rate on Wednesday by 25 basis point to a range of 2% to 2.25%. Fed Chairman Jerome Powell said, “It's not the beginning of a long series of rate cuts,”. The current rate cut is a reaction of the Central Bank to an economic slowdown, and its further actions will depend on the state of the economy. The Fed also noted the trade war negative impact on the US economy.

Trump shocked the markets in May by hiking tariffs to 25% from 10% on $200 billion in Chinese goods. China immediately retaliated and said a trade deal will not be reached unless the existing duties were stripped. In this light, the safe-haven assets are needed to be bought.

As a result, Interactive chart of historical data showing the broad price-adjusted U.S. dollar index published by the Federal Reserve has shown its MAX since 2017.

The Banks of Japan and England maintaining the existing structure of the financial system have decided not to change the existing status.

A new round of the trade battle between the United States and China. “The U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country,” says Trump in a tweet. China quite naturally replied that it would respond adequately.

Nothing foreshadowed trouble. On Monday, American delegates arrived in Shanghai. Although that did not bring any special results, the parties agreed to meet in September already in the United States. That is, it would seem, there is a certain process. And here Trump comes out with his statements. We have a small conspiracy theory about this.

Pay attention! The time when Trump announced a new round of trade war is similar to the Fed’s decision the reaction and Powell’s comments as well, which led to a rise in the dollar price. Recall, Trump is extremely dissatisfied with the strong dollar, but, despite all his criticism of the Fed and Powell, the US Central Bank continues to bend its line, ignoring the requirements of the President. What Trump has to do if it is not possible to push through the idea of currency intervention, for now?

He has only one tool of indirect influence - trade war. Its escalation will force the Fed to lower the rate further, which in turn will drive to a decline in the dollar value as a reaction to the cycle of depressions.

Another important event last week was the publication of statistics on the US labor market. The NFP came out worse than forecasts, but on the whole, the value is sufficiently neutral (although we note that the June’s job report has revised down by more than 30K).

Our position on the dollar remains unchanged - we recommend selling it. Escalating trade war increased the likelihood of several Fed rate cuts in 2019. Data on the NFP signal a slowdown in the US economy and Trump makes it unequivocally clear that he intends to “fight” a strong dollar. So the current week we declare a week of dollar sales.

Besides, it makes sense to buy safe-haven assets. Remember, sell the Russian ruble and oil.