Jane Foley, Senior FX Strategist at Rabobank suggests that a trade war between the world largest economies would create a whole catalogue of secondary effects that are set to resonant through most of the global economy and as a consequence they see several other currencies as more vulnerable than the USD over the medium-term.

Key Quotes

“In view of the news regarding trade wars over the past 24 hours, it is not surprising that the safe haven JPY has been one of the best performing G10 currencies on a 1 day view, while the USD is languishing towards the bottom of the board.  What is unusual, however, is the JPY is sharing the podium with the AUD and the NZD.  Within the context of the G10, historically these two currencies tend to be most sensitive to a decrease in risk appetite.  AUD bulls are arguing that Chinese tariffs on US goods could open opportunities for other producers.  This, however, ignores that fact that the AUD along with the currencies of other commodities producers would be in the firing line if a trade war caused the Chinese economy to slow.”

“Following the downtrend that prevailed through most of 2017 and into early 2018, the USD has been trading on a firmer footing since February. We expect that support from interest rate differentials will lend the USD additional support in the coming months particularly if a reduction of risk appetite results in increased demand for treasuries.”

“We retain the view that under the shadow of currency wars that the USD will outperform a wide range of EM currencies this year in addition to the AUD and the NZD due to their trading links with China. The EUR may hold up relatively well due to the Eurozone’s large current account surplus which could allow it to display safe haven tendencies. As a consequence, we expect further choppy, consolidative trading in EUR/USD in the coming months.  That said, we see greater scope of a break lower in EUR/USD and look for a move to EUR/USD1.21 by year end.”