The European currency is increasingly being used as the main currency of financing for carry trade

To win the war, you often have to consciously lose individual battles. Donald Trump says he doesn’t follow U.S. stock indexes, though all his Twitter followers know how the U.S. president is happy with the success. The de-escalation of the trade conflict between Washington and Beijing, coupled with a preemptive reduction of the Fed’s rate by 75 bps allowed the stock market to increase its capitalization by 25%, after which the owner of the White House decided to retreat. The new tariffs for Brazil, Argentina and France have led to two-day sales of the SP 500. They accelerated after Trump’s announcement that he was willing to wait and could afford a comprehensive agreement with China after the 2020 presidential election.

Of the two evils, the smaller ones are chosen, and it is quite possible that the White House considered that at this stage the strong is a greater threat to the U.S. economy than the correction of stock indices. The rally of the U.S. stock market and the associated inflow of capital to the United States faithfully served as a greenback in 2019, so the pullback of the S’P 500 weakened its position. Deutsche Bank argues that the euro is increasingly used in international borrowing, interbank financing and carry trade transactions. This year’ game on the difference with its participation has become effective for 20 of the 23 money units tracked by Bloomberg developing countries. This fact, cheap liquidity from the ECB and record low volatility contribute to the fact that the euro takes away from the dollar the status of the main currency of financing.

Efficiency of carry trade

Efficiency of carry trade

Source: Bloomberg.

If everything is really the way Deutsche Bank believes, it becomes clear that growth is becoming clear in response to the deterioration of global risk appetite, including the escalation of the conflict between the United States and China. At the same time, it should be understood that without an end to the trade war, no recovery of the European economy is out of the question, so the short-term successes of the euro do not say anything. On the medium- and long-term investment horizon, the prospects of the single European currency are deteriorating. Moreover, the tensions between Washington and Paris could escalate into a new trade war involving the EU.

France, in response to the U.S. intention to impose a 100 percent tariff on $2.4 billion in imports (about 5% of the $52 billion of supplies to the U.S. market in 2018), said Brussels would retaliate. The old world is one, and if one of its representatives is offended, everyone else will stand up for him. Yes, the introduction of the digital tax mainly affected U.S. residents, but it should be understood that the average tariff for companies working in this area is only 9.5%, for the rest – 23.2%.

Donald Trump’s non-peaceful rhetoric towards China reduces the chances that tariffs on $156 billion of deliveries from the Celestial Empire to the United States will not be introduced from December 15. This increases the risks of further correction and growth to 1.1115 and 1.1135. At the same time, it should be understood that the next escalation of the trade conflict between Washington and Beijing will immediately affect European business activity and soon cut off oxygen to the “bulls” of the euro.

Dmitry Demidenko for LiteForex