LONDON (Reuters): Foreign exchange markets appear convinced that a global trade war is unlikely to break out anytime soon, although with long bets on some currencies at record highs, investors fear complacency may be setting in.
While the Trump administration’s threat to slap tariffs on Chinese imports has heightened fears of retaliation from Beijing, it has only mildly rattled markets enjoying a multi-year rally as global economic growth picks up.
The finance ministers of the 20 big world powers meet for a key G20 summit on Monday. Currency managers are keen to see whether diplomacy breaks out or disagreements deepen between the US and others in the wake of US President Donald Trump’s announcement on imposing tariffs on steel and aluminum imports.
Currencies don’t like trade spats. President Obama’s relatively narrow tariffs on Chinese steel in May 2016 saw the dollar index.DXY fall more than 2 percent over a month. Against the yuan, it rose 2 percent CNY=.
Similarly, within three months of Psresident George Bush’s March 2002 tariffs on EU steel imports, the dollar declined 6 percent.
The latest trade skirmishes come as global currency volatility slips back after a February spike off multi-year lows. It remains below levels seen in recent months, according to a Deutsche Bank volatility gauge. That leaves investors looking for early warning signs in currency markets that a broader shake-up of prices is coming. Some currencies have moved as one would expect when smooth trade is under threat: The Canadian dollar has weakened and the Japanese yen has firmed, but the moves have for the most part been limited. “The talk of trade wars at the moment is just that, talk. It’s such a difficult thing to quantify it appears as if the market is just ignoring it,” said Russell Silberston, a currencies manager at Investec Asset Management, which manages about $140 billion in assets.
“But don’t get me wrong, we’ve got it (the prospect of a trade war) down as a key event risk.”
Currency repercussions should a trade war materialize would be significant because low volatility levels have driven investors to embrace higher-risk strategies. Speculative positions in emerging market currencies, for instance, stand at multi-year highs.
“I’m still amazed by the lack of a reaction in Asian currencies. They must be waiting for the Chinese retaliation,” said Richard Benson, co-head of portfolio investments at Millennium Global, a currency investment manager in London.
“There would be quite meaningful moves. We are talking about Asian currencies that are at their strongest for years. There is zero of this (the risk of protectionism) priced in,” he said.
Benson believes big Asian exporters are most at risk, including the South Korean won KRW= and the Taiwanese dollar TWD= as well as the Australian dollar AUD= – a proxy for Asian economic growth.
The won and the Singapore dollar SGD=, another currency exposed to global trade flows, are trading near their strongest levels against the dollar in more than three years.
Among developed world currencies, Sweden’s crown EURSEK= is tipped by some for a tough time – ING strategists point out Sweden is the second-most open economy in the G10 group of rich countries based on a ratio of trade and economic output.
Bank of America Merrill Lynch sees the Canadian dollar CAD= most at risk, while the US and New Zealand dollars also look vulnerable. The Swiss franc and euro would emerge stronger, they said.
