What next for Trump on US-China trade war?

It has been a week that Yuan broke 7 levels without any concrete reaction from Trump administration (naming China currency manipulator was at most cosmetic). The options and their viability for the administration to reply to China or to divert public attention from the US-China trade war are as follows:

1.      Treasury intervention in FX markets: Trump administration can intervene in the FX markets through the $100 bn US government stabilization fund. The fund size is too small to make any impact in global currency markets. China has far more firepower (USD 3 trillion) and independence than US government and FED put together for FX intervention. For intervention of more than $100 bn Trump would need Congress’s approval which might be difficult to obtain given the increasing domestic reservation against Trump’s rhetoric on the trade war.

2.      FED cutting rates: The FED would want to maintain its independence and therefore it is unlikely to deviate from a rational monetary policy track based solely on Trump’s coaxing.

3.      Iran: Trump can take on Iran in the strait of Hormuz but to what end / political victory remains uncertain. Therefore this seems a no go option given military involvement and the empirical evidence of no action against North Korea.

4.      Increase trade rhetoric: Trump can increase its trade rhetoric on EU / slam additional tariff on China.

  

Of all the options above it seems that the lowest hanging fruit is to increase the trade dispute rhetoric against the EU or increase tariffs on Chinese goods. This would help Trump garner more support for a future dollar devaluation domestically. The increasing trade dispute concern would also reflect in the yield curve pushing the FED to cut and therefore keeping the dollar muted.

Therefore Trump administration would most likely step up the trade war roiling risk sentiments further. Driving USDCNH and USDINR higher. With this thought USDINR looks like a good buy at the current 70.75 levels for a move to 71.50 next week. The fact that intervention looks like a difficult option for Trump a sudden dollar slide looks like a smaller possibility in the near future.