If there is one event anyone can recollect immediately from Donald Trump’s first Presidency, it is the trade war. Beginning January 2018 (a year after the swearing in), Trump enforced import tariffs on various goods, some focussed on China.
It later turned out to be a major trade war between the US and China as the latter also started imposing tariffs on US imports. The US dollar gained momentum on the back of the trade war. As a result, commodity prices such as base metals and crude oil were beaten down.
The Indian rupee also took a hit as the Chinese Yuan weakened sharply during that time. With Trump focusing on tariffs this time too, will there be a déjà vu effect on commodities and currencies ?
Metals meltdown
Base metal prices were directly impacted by the earlier trade war. It began in January 2018 when a tariff on all imports of washing machines and solar panels were imposed. The tariff war then intensified in March 2018 when a tariff of 25 per cent on steel imports and 10 per cent on aluminium was announced.
Until 2017, the base metals were on a bull run. The S&P/TSX Global Base Metal Index peaked at 132 in January 2018 and tumbled about 35 per cent to around 85 by the end of 2018. Among the individual metals, Zinc, down 29 per cent was the worst hit during this period. Aluminium prices fell by 17 per cent and Lead was down 19 per cent. Copper and Nickel declined about 16 per cent each.
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The Dollar impact
The trade war aided the US dollar to gain strength. After witnessing a 10 per cent fall in 2017, Trump’s first year of Presidency, the dollar index bottomed near 89 in February 2018. From there the index surged 8 per cent to end 2018 near 96.50. As the trade war was more focussed on China, the Chinese Yuan was knocked down by the dollar strength. The Yuan fell about 10 per cent from around 6.25 to 6.95 against the US dollar.
The Indian rupee had a strong correlation with the Chinese Yuan at that time. As a result, the domestic currency fell a victim of the US-China trade war. The Indian rupee depreciated from around 64 to 70 against the dollar in 2018, down by about 8.5 per cent for the year.
The Crude case
Crude oil price witnessed a strong rally until the third quarter of 2018. Supply disruption due to sanctions on Iran and economic crisis in Venezuela - the country with largest oil reserve, had pushed the price higher then.
But the trade war resulted in China cutting down its oil imports from the US causing oil prices to crash towards the end of 2018.
According to the US Energy Information Administration (EIA) the exports of Crude Oil and Petroleum products to China tumbled from 15.89 million barrels in July to 6.29 million barrels in December 2018.
Brent Crude Oil prices crashed by about 38 per cent from its peak of about $85 per barrel in October 2018 to $52 by the end of that year.
What to expect now? Donald Trump coming back to power has reignited the fear of trade war again. Ramesh Varakhedkar, Head – Commodities, ICICI Securities Ltd says, “Import tariffs in the US, particularly from China, can increase to strengthen domestic manufacturing and reduce trade deficits. There could also be renewed efforts to impose tariffs on European goods in response to trade disputes”.
The US dollar is likely to remain strong. The dollar index has already appreciated by about 4 per cent from around 103 to 104 since the election outcome.
This could be negative for emerging market currencies such as the Indian rupee. A Research Analyst for Commodities and Currency from Emkay Global Financial services, says, “If the trade tensions intensify, emerging markets are likely to see further currency depreciation, reflecting the broader impact of geopolitical uncertainties”.
Trump’s policies can keep the base metal prices also under check now. Sandeep Daga, CEO, Metal Intelligence Centre (MIC), says, “investments into renewables can take a back seat as Trump is anti-green. So, the demand for copper, aluminium etc can take a hit”.
“Drill baby drill”, the campaign slogan of Donald Trump is likely to aid in increasing the domestic oil production in the US. So, the chances are high for the oil prices to stay lower going forward. According to Emkay Global Financial Services, the tax incentives for capital investment could stimulate further oil exploration and the increased oil output from the US can soften the oil prices.