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The trade protectionism theme of the US shot back into focus as a potential major left tail risk for markets which got further aggravated by the subsequent retaliatory rhetoric from Europe and Asia.
Will China render blow for blow? It appears to be. At least China has made the stronger response. After the US government unveiled the detailed list of Chinese goods that could be soon subject to 25% tariff, China’s statement sounds tougher. A spokesman of Commerce Ministry said that China plans to immediately bring relevant U.S. practice to the dispute settlement body of the WTO, and is ready to take countermeasures on U.S. products with equal force and scale that will be published in the coming days.
Obviously, America’s list suggests that the US government targets “Made in China 2025” initiative, while China’s retaliation intends to bring Americans back to the negotiation table. John Sullivan, acting Secretary of State, will meet Chinese Ambassador the US Cui Tiankai today.
As usual, both sides are likely to issue a statement full of diplomatic rhetoric, while leaving the door open.
On a separate note, China’s private Caixin composite PMI declined to 51.8 in March, from 53.3 previously, indicating that there is a considerable moderation in economic activities. It appears that the trade war concerns have been escalated to the real sectors.
The arguments in favor of a stronger CNY, both against the USD and in TWI terms, still remain in place: positive growth differentials; on-going trade tensions which are raising tolerance levels for a stronger CNY; CNY outperformance during periods of elevated risk-aversion and an attractive carry to realized volatility ratio. The outperformance of CNY was quite noticeable during the recent turmoil in global equity markets.
Trade tips: Buy 6M EURCNH ATMF vs. ATMS put spreads, Option-based carry to exploit constructive FX view and elevated carry/vol.
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