The fact that major economies don’t bomb each other anymore like 1940s has a lot to do with trade and investment linkages. And if these dependencies are removed then we would go a full circle but that is perhaps decades away, and hopefully never.
The question in currency markets is whether increasing trade sanctions are going to benefit the dollar or otherwise. For other asset classes the answer is much simpler even though gold has not been showing its safe haven properties off late. Purely from trade/investment sanctions play I would think given the fact the equities will lose their attractiveness we will see a run to safe havens in currencies leading to gains in USD against most DM and all EM currencies. In this environment why I would not favor the Euro is because of the uncertainty in French and German politics along with Brexit related concerns, all of which would keep the attractiveness of Euro as a reserve currency, to low. Only once the markets are clear about the trajectory of these sanctions (whether they are for real or just posturing for negotiations) will they look at other factors like a potentially inverted US yield curve or a slowdown/recovery in EU.
Yuan seems to be factoring in a major impact from the trade sanctions chatter which should keep other EM currencies and INR under pressure. USDINR 1m NDF is trading at 28p indicating higher offshore buying pressure since yesterday. Oil, most EM currencies and FII flows do not help INR’s cause either. Nationalized banks have been seen selling USDINR at 68.20 levels. Medium term range for USDINR is 67.80-68.50. CMP 68.20, Range 68.14-68.45.
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