By DAR Wong
In August, US President Trump chided Federal Reserve policymakers for supporting further interest rate hikes which would decelerate the country’s economic growth. Since December 2015, policymakers have tightened the interest rate 7 times, of which 5 times were during Trump’s Presidency. The irony was that Trump had previously complained that the Fed was too loose with the US money supply before he took office!
The next US Federal Open Market Committee meeting would be held on 26 – 27 September. Market analysts and traders believe that another rate hike is on the horizon which would strengthen the US Dollar, and could potentially lead the US economy down the road into stagflation.
The recent US 2Q GDP grew 4.2 percent and the fastest pace witnessed in the past 4 years. Trump has claimed credit for the US economy’s expansion. However, with the existing trade war with China, Europe, North America and almost every other parts of the world, Trump caused currencies of Emerging Markets to tumble against the US Dollar. This is notwithstanding the new law to that reduced the repatriation tax rate for US companies.
As the US Dollar appreciated considerably, it also put a cap on commodity prices. In face of that, Latin America and other emerging markets saw their currencies lose tremendous value, weighing on their national reserves and export revenue. Since April 2018, the eruption of US trade war against China has caused the Chinese Renminbi to tumble. The USD/CNY exchange rose from 6.40 to 6.95 level. Fundamentally, the move of the Renminbi could be seen as a countermeasure by the Chinese central government to meet Trump’s imposed tariffs on its goods.
Domestically in the US, technology companies have disclosed unhappiness to President Trump’s insensitivity. In fact, market analysts postulate that China is gaining on the US in terms of Artificial Intelligence in the recent years and with Trump scrutinising and dominant US tech names like Amazon, Google and Twitter, Trump could be opening the doors wider for China to surpass the US in technology.
Knowing the behaviour of President Trump to be a fickle personality, his contest against raising interest rate might take a turn come end-September. After all, an interest rate hike would also put pressure on Emerging Market currencies (including China), forcing them to concede to his trade deal.
Commodity prices will begin to falter and whipsaw again when September’s hike materialises. In our opinion, crude oil prices might rise due to the US sanction on Iran, and impact on supply caused by the recent Hurricane Gordon on the Gulf of Mexico. Hence, be prudent in your portfolio and watch for a possible drawdown in most of the market instruments in September.
~ DAR Wong is a professional in financial field based in Singapore. The opinions are solely at his own. He can be reached at firstname.lastname@example.org