Asian stocks gained marginally yet trade worries have held down sentiment. News flow indicates that, Chinese officials
disagreed with President Trump's version of restarting trade talks between Washington and Beijing. The conflicting signals are
potentially more worrying then actuals status of trade talks. So far, the RMB has been used to offset US import tariffs more than
representing weakening fundamentals. A fact that seems to infuriate US President Trump. The President has long rallied against the use of
the Chinese currency as a tool to gain an advantage in trade. In our view, Trump tweets mentioning the Fed are less about actual interest rates
(Trump has functioned as t borrower with significantly higher rates) but the positioning of the USD. Clearly, he is envious of China's
ability to set currency prices. Given the new round of tariffs on Chinese imports, USDCNY should keep rising. Estimates indicate that if all
30% tariffs on Chinese goods in the recent announcement are enforced USDCNY will potentially need to appreciate to 7.95. In general, we had
expected a reduction of trade tension as in past escalations. However, this has not occurred yet. Trump's order for Americana companies to
relocate, citing powers granted by the International Emergency Economic Powers Act of 1977, has shifted the battle lines. We doubt the Act
provides the President to pull current companies out of China, but can provide the tools to make relocation and current business extremely
difficult. This escalation, out of the trade into investments, will not go unanswered by the Chinese. There are a few logical options but a
weaker RMB must be high on the list.
By Peter Rosenstreich
