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Feb 03 - 09:55 AM

Credit Agricole: Trump’s Trade Wars and FX – The Playbook

By eFXdata  —  Feb 03 - 09:30 AM

Synopsis:

The aggressive US tariffs on Canada, Mexico, and China (1 Feb) could mark the beginning of a prolonged global trade war that will shape FX price action in 2025. The 2018-19 playbook suggests USD strength on risk aversion and deepening growth divergence. However, key differences from 2018-19 could limit the extent of the USD rally.

Key Points:

  1. Trade War and FX Reaction:

    • Risk aversion → Safe-haven flows into USD.
    • Growth divergence → US economy could outperform trading partners, supporting USD.
  2. Key Differences vs. 2018-19:

    • USD already overvalued → Less room for gains.
    • Fed vs. global central banksSmaller policy divergence compared to 2018-19.
    • US fiscal challenges → Higher deficit, debt, and borrowing costs could limit USD’s appeal.
    • US stock market risk → Excessive long US equity positions (funded in JPY, CHF, EUR) could unwind, affecting flows.

Conclusion:

While the USD could strengthen on trade war fears, overvaluation and structural risks may cap gains. Credit Agricole is reviewing its G10 FX forecasts in light of these developments.

Source:
Crédit Agricole Research/Market Commentary

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