Global currency markets continue to be roiled by US-China trade war

It would be odd if the US-China trade war had played no rolein the slowdown in China’s industrial production growth to 4.8 per cent, year on year, in July. That was China’s slowest pace of expansion since February 2002. But the effects of the trade war extend far beyond the Chinese and US economies. Markets are adjusting to reflect the ripple effects and will continue to do so.

Data released last Wednesday showed Germany’s economy contracted in the second quarter as exports slumped. Given that China is a key export destination for German manufacturers, its slower growth must have contributed to Germany’s poor economic performance. This has a ripple effect on the wider euro zone and its currency.

Germany is the economic powerhouse of the euro zone, so evidence that its economy is struggling is bad news for a common currency bloc that already has its fair share of problems. A monetary policy reaction from the European Central Bank always becomes likelier when Germany’s economy shows signs of frailty and, right on cue, the ECB is prepping markets for just such a response.

“It’s important that we come up with a significant and impactful policy package in September,” ECB policymaker and governor of Finland’s central bank Olli Rehn told The Wall Street Journal last Thursday. “When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”

With the ECB’s benchmark interest rate already in negative territory, and further easing now imminent, the currency market logically marked down the value of the euro. It could fall further, including against its neighbouring currency, the Swiss franc.