How to trade a trade war: Strategists weigh in as US-China tensions mount

The US and China remain at loggerheads over trade. (Photo by Artyom Ivanov via Getty Images)
  • The next month of negotiations between the US and China will determine whether the current tensions escalate into an all-out trade war.
  • Fund managers and strategists are shifting into safe-haven assets such as US treasuries and the Japanese yen.

Fund managers and market strategists are shifting into long-term bonds and safe haven currencies as the US maintains its strong protectionist stance against global trade.

In the wake of last week’s additional $US200 billion tariff threat by the US against China, stock markets have so far been relatively sanguine in their response.

But according to UBS, the prospect of a significant escalation in trade tensions is now apparent. August 20-23 looms as the key deadline before the next wave of US tariffs are implemented.

So, if the two sides can’t find common ground over the next month, then the current tit-for-tat skirmish is likely to morph into an all-out trade war.

Currency strategists at Morgan Stanley (MS) are bearish on the Australian dollar, given its status as a proxy for global risk appetite — which could wane significantly in the event of a trade war.

“We maintain that in an environment of declining global liquidity, rising volatility, and waning risk appetite, currencies like the AUD — of countries with large current account deficits and high degrees of household leverage — should under-perform,” MS said.

Source: Morgan Stanley

MS also recommend betting on the safe-haven Japanese yen against the South Korean won.

“Korea’s preliminary export figure for May significantly slowed, suggesting weakness in China and the impact of global trade tensions,” MS said.

At the same time, they expect the recent bout of weakness in the yen to reverse course, with broader strength contributing to outsized gains against the vulnerable Korean currency. The analysts’ target for JPY/KRW is 10.4, up from the current level of 10.05.

For Australian investment manager AMP Capital, buying long-term US treasuries is the best portfolio-protection strategy in a trade war.

Ilan Dekell, AMP’s head of macro for global fixed income, told Bloomberg that AMP has increased its position in 30-year US bonds over the last six weeks.

AMP also expects continued US dollar strength against emerging market currencies as the US Fed tightens monetary policy, which comes with an associated withdrawal in USD liquidity.

Dekell said AMP’s domestic portfolio is more positioned towards short-term Australian government debt, as the fund manager expects the RBA to keep interest rates on hold until 2020.

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