Talking about global trade, things are heating up, especially with Trump’s plans. Rumor has it that on his first day in office, he’s going to
push hard on trade tariffs.
Goods from
Mexico and Canada, which used to be tariff-free under NAFTA (now USMCA), will face a
25% tariff.
That’s not all, goods from China will face an
extra 10% tariff... as if the previous ones weren’t already high enough to touch the moon!
If this really happens, international trade is going to get even more complicated. The clear impact will be
higher prices for imported goods, and ultimately, consumers will bear the extra burden.
But China isn’t standing still. China plays its cards in the currency game. They’ve started devaluing the yuan against the USD, now at
7.32, a
17-year high.
This devaluation clearly is one of China's efforts to make their products could compete in the high tarriff environtment. The previous all-time high was back in 2003, at
8.28.
Our Chief Strategist projects that t
he 8.0 level is very likely to be reached again, particularly as a strategic move to boost the competitiveness of China’s export products, such as in the manufacturing and technology sectors, in response to US trade tariffs.
Because of these tariff battles and currency wars, the
USD is becoming increasingly stronger and scarces.
Why? Countries that want to “
create” dollars must trade with US first to receive payments in USD. This makes
USD even more sought after.
Our Chief Strategist believes the USD will remain strong, at least until the end of this year, especially since around
60% of SWIFT transactions are still Dollar-based.
Although certain countries are trying to reduce their dependence on the USD, but USD remains the first top choice currency for global trade. And yuan? Its share is still small, only about
2.69% as of October 2024, even though it’s starting to be used in trade.
So, the
demand for dollars in international trade remains very high. With this dominance, it’s no surprise that the USD is still the world’s main reserve currency.
In short, the USD won’t weaken anytime soon, it’s still a long way to go. And it's gonna be very painful
Not only to other countries need USD for transactions, even US itself requires a lot of USD to pay its bonds interest. This makes the
USD an incredibly scarce currency with an increasingly strong position in the global market.
This is also already captured and anticipated by China government. One of their moves is issuing
USD 2 bn worth of USD bonds in Riyadh in November 2024.
That’s why we encourage investors to f
ocus on issuers with Dollar-based earnings. Especially with the potential weakening of the Rupiah linked to the CNY, this will make USD earners even more attractive. Our top picks are
AADI and
ENRG.
This isn’t just about the current momentum but a strategy to prepare for the future. With the USD continuing to dominate global trade, it makes sense to pay extra attention to sectors or issuers that benefit from the dollar’s strength.
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