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US Dollar Comeback Ahead? US-China Tensions Push Havens Higher

US Dollar Comeback Ahead? US-China Tensions Push Havens Higher

Dimitri Zabelin, Analyst

US Dollar Analysis, US-China Tension, TikTok, WeChat, Trump Executive Order, US Economy Outlook – TALKING POINTS

  • US Dollar may catch a haven bid as the US and China lock horns over technology
  • Trump executive orders may encounter congressional friction, spark dash to cash
  • Biden VP announcement could fail to stir markets unless the choice is unexpected

US-China Tension Growing, Pushing Haven-Linked USD Higher

The US Dollar may recover from its aggressive selling streak if geopolitical risks surrounding US-China tensions catalyze a so-called “dash for cash”. Contrary to the popular narrative suggesting the conflict has “resurfaced”, a source of friction has – at least in the past two years – has been steadily present.

Therefore, it is less a “resurfacing” and more so an irritation that threatens to turn market sentiment septic and further compromise the health of the global economy. On Friday, US President Donald Trump signed several executive orders targeting Chinese technology companies. The documents prohibited transactions between US-based citizens and Tencent subsidiary WeChat and ByteDance’s infamous social-media spawn TikTok.

The measures are part of a broader trend of growing hostility between the US and China over concern of the national security threats the latter poses to the former, particularly through social technology vectors. Preliminary talks between Microsoft and ByteDance executives over the sale of TikTok have already been underway amid growing speculation of a ban prior to the official announcement.

The executive orders takes place in 45 days, so firms have to effectively ratify an agreement within that multi-week window. The legalities and implications surrounding the ban remain amorphous, so it is possible that users may have access to these apps but with limited scope. Regardless of the more nuanced details, the macro-fundamental implications could amount to a tailwind for the US Dollar.

With the 2020 US Presidential election knocking on the door amid the coronavirus pandemic, the impact of a politically-induced shock could have a disproportionate impact on economic growth and market sentiment. Consequently, this may then push the haven-linked US Dollar higher at the expense of equity markets and cycle-sensitive currencies – particularly those geared to Chinese economic activity, like AUD and NZD.

US Fiscal Stimulus Tailwind for Greenback

As a result of a stalemate between Republicans and Democrats over another relief package, Trump signed four executive orders aimed at adding onto the prior stimulus package. These include:

  • Extending unemployment benefits, one of which is a $400/week payment down from $600.
  • A payroll tax holiday to those making less than 100k a year.
  • Deferment of student loan payments through 2020 and
  • Extension of moratoriums on evictions.

Some of the measures may encounter legal friction since their funding will require approval from an intransient congress during a polarizing election season. However, one area that policymakers on both sides of the aisle appear to agree on is a second round of $1,200 stimulus checks. However, this oasis of consensus may be insufficient in bridging other areas of disagreement. Prolonged disagreement may undermine sentiment and push the US Dollar and Japanese Yen higher.

Biden VP Choice

Former Vice President and Democratic nominee Joe Biden will be announcing his running mate this week. While the potential volatility to emerge from this event is unclear, a candidate with comparatively more ambitions policy goals – like Elizabeth Warren – may add another layer of uncertainty in what is an already-uncertain political environment.

Furthermore, any pick that may be seen as complicating Mr. Biden’s chances may induce cross-asset volatility and boost the US Dollar. Markets are most concerned with scope for policy volatility rather than a given candidate. To that end, they may bristle at prospects for resuming the trade war with China, prolonged friction with the EU and a continual battle with monetary authorities that a second Trump term could bring. That may put a premium on haven assets.

US Dollar Currency Basket, EUR/USD, AUD/USD, GBP/USD, NZD/USD – Daily Chart

Chart showing US Dollar Index

US Dollar chart created using TradingView

The chart above illustrates US Dollar dynamics amid two years of intense political and economic volatility. For example, the US-China trade war hammered growth-oriented assets like AUD and NZD and helped lift the highly-liquid Greenback.

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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