New “cold war” between the US & China and the impact it has brought on the FX trading industry

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The USA’s relationship with China has always been complex and progressively deteriorated recently, pulling down with itself global financial markets, stocks, commodities, and currencies. The Sino-US relations sharply worsened following a series of events under Donald Trump’s administration, the most recent and scandalous of which was on Monday 3rd of August, when Trump set September 15th as the deadline for the famous Chinese video-sharing social networking service TikTok to find a US buyer, and eventually failing to do so will lead to banning of the app in the country.

Just a few days before the announcement, the US had ordered the closing down of the Chinese consulate in Houston, which in turn triggered China to close the US consulate in Chengdu. The move was described as “political provocation” by Beijing. This unprecedented event wounded the Chinese yuan which faced its worst week of trading in the summer period.

The beginning of an end: COVID – 19 as a foundation of the break

Earlier this year the 45th POTUS blamed the Chinese government for deliberately spreading the novel coronavirus which had subsequently caused a global crisis. The pandemic took its toll on the economy, crippled financial markets and even managed to turn oil prices negative. Trump was further accused of being racist when he called the pandemic a ‘Chinese virus’ and that China “must be held fully accountable.” The Trump administration has also ended its longstanding relationship with the World Health Organization, accusing its contribution in the delayed response to the virus. China in turn has criticized the US for its poor response to the outbreak and speculated that US soldiers have planted the virus in Wuhan in late 2019.

COVID -19 was just one the reasons that tensions between the two superpowers amplified.  Following Donald Trump’s rise to power in 2016, the POTUS had accused China of exploiting its trade relationship with the US. Donald Trump decreed tariffs on Chinese goods after stating that China was selling far more goods to the USA than it purchased itself.  This commenced what is now known as a ‘trade war’ between the two superpowers that has lasted over the last two years. And even though the superpowers signed a truce to ease the tariffs in January 2020, this did not happen.

The US has accused China of being a security threat and challenged its control over the South China Sea, claiming that it was “completely unlawful”. On July 23rd, US State Secretary, Mike Pompeo, proclaimed his aggressive stance on the situation, saying that “the only way – the only way to truly change communist China is to act not on the basis of what Chinese leaders say, but how they behave. And you can see American policy responding to this conclusion. President Reagan said that he dealt with the Soviet Union on the basis of “trust but verify.” When it comes to the CCP, I say we must distrust and verify.”

How will trading be affected by Sino-American relations?

The worsening geopolitical tensions unnerved investors and caused turmoil to the markets across the world, prompting them to move to safe-haven commodities such as Gold, whose price stabilized below $1,900. On Monday, the last week of July 2020, U.S stock futures declined, following a similar fate that Asian Markets faced last week. S&P500 futures plunged 0.2%, Nasdaq futures dropped 0.3% and Japan’s Nikkei tumbled 1.3%.

High market volatility brings opportunities and risks. Under the increased trading activity and volume, Brokers need to look for alternative solutions to shield themselves from risk caused by unstable market conditions and focus more on managing the leverage and margin in hedged trades, minimizing gaps between themselves and their liquidity provider’s margin utilization. To safeguard Brokers in such volatile times PLUGIT offers a solution, which has changed the landscape of the risk management sector in the financial trading industry and quickly gained huge popularity among brokerage firms worldwide. Dynamic Margin (Tiered Margin) Module helps brokers to automatically monitor and react to risk based on pre-defined parameters and margin utilization and is compatible with MT4 and MT5 platforms.

So what does the future look like for the US dollar?

Risk managers cannot keep their eyes on the market constantly, but a warning when market changes and even auto execution of risk control can be pivotal. Similarly, to how the global stock market plummeted last week, the Sino-American tensions are bound to bring volatility to major currencies, particularly the US dollar. Should relations between the two nations continue to decline, China could choose to reject USD transactions. China’s desire to bypass the USD and all Western institutions would hurt the USD and reshape the financial world forever.

As the dollar index stands at its lowest level in the last two years, brokers and traders need to ensure they can conduct their trades as safely as possible. The conflict between the US and China is not purely economic – it is also political and cultural. And with Donald Trump’s pressure to achieve rebalanced trade, it seems like the new “cold war” between the two superpowers is just starting.

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