US President-elect Donald Trump’s threat to impose 100% tariffs on any country that supports a currency to replace the US dollar marks the latest in a series of increasingly aggressive moves against global trade and China.
One can’t help but wonder if Trump has spent some of the last few years reading The Thirty-Six Stratagems, a Chinese essay used to illustrate a series of stratagems used in politics, war and civil interaction. He appears particularly taken with Strategy 27, where you feign madness while remaining perfectly sane. The aim is to deceive your opponent into underestimating you, leading to overconfidence and a lapse in their guard — at which point you strike.
In Trump’s version, it is more like exaggerating potential actions so that the eventual lesser actions seem reasonable. It is a case of threatening Armageddon but only implementing partial destruction, which seems acceptable in light of the original over-the-top threat.
These are not trivial questions, as the answers have significant implications for strategic planning across all businesses engaged in exports, not only to China but also to the US. Seven key reserve currencies are routinely used to settle trade. Is Trump suggesting that trade can no longer be conducted in euros, UK pounds, yen, yuan, Canadian dollars or Swiss francs? The threat — mad or sane, realistic or unrealistic — impacts global trade stability, so it cannot be dismissed out of hand.
Perhaps the single most important shift in the global payments environment is the demise of the petrodollar. Oil is no longer required to be exclusively traded in US dollars.
Already, the oil kingdoms in the Middle East are conducting oil trades in yuan, rupees and euros. They are exploring the establishment of oil commodity exchanges based in the Middle East, where oil can be traded in multiple currencies. Does this fall under Trump’s umbrella, backing any other currency to replace the US dollar?
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Global cross-border trades have been settled using the Swift system, which is an arrangement between counterparty banks to pay US dollar obligations. This system is also used for other currencies. However, the weaponisation of this trade settlement method has resulted in a decline in trust in the system.
Weaponisation has also included unilateral US sanctions, exclusions from the system and confiscation of US
dollar-denominated assets on political grounds. As trust in Swift has fallen, there is a push to establish alternative trade settlement systems. The socalled Brics (Brazil, Russia, India, China, and South Africa) currency is not a new currency but a trade
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settlement system based on blockchain, unbound from the US dollar as its primary reference. This means that a trade can be completed in Singapore dollars without the need to convert to US dollars and then reconvert to the customer’s currency. This is more efficient and faster and reduces losses due to currency fluctuations.
Trump’s most recent threats, outrageous as they appear, have the potential to impact the way trade is conducted with China and the way trade payments are settled with China.
Sanity — or something resembling it — may ultimately prevail, but until the situation stabilises, companies must weigh all possibilities and their potential impact on operations with China. Then again, perhaps this apparent madness is, in fact, a calculated strategy.
Technical outlook for the Shanghai market
The Shanghai Index has staged a strong breakout from the downtrend line, which defined the market’s temporary retreat. The rebound developed from the second anchor point used to plot the longer-term uptrend line.
As noted last week, although the two potential trend lines intersect around Dec 4, this pattern is not an equilateral triangle. This means there are no pattern projection targets.
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However, the two trend lines show strong competing forces in the market, so a breakout above or below the trend line can quickly move the market to new levels.
The rebound also commenced from the midpoint of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator, which is an additional support feature. The consistent degree of wide separation in the long-term GMMA shows the strength of support. When the market retreated, there was no indication of compression in this group of averages, which indicated that investors remained buyers as the short-term downtrend developed.
This wide separation in the longterm GMMA also suggests that the rebound is sustainable, with initial targets near 3,435.
A breakout above 3,435 has an initial upside target near the previous high of 3,675. This is not a historical resistance target, but the peak high acts as a psychological resistance level.
This rebound also confirms the placement of the longer-term uptrend line. This can now be projected further into the future when it is expected to act as a new support level. This is confirmed when the market retreats and rebounds for the value of the line. This will create a third anchor point for the line. Prior to the breakout, the potential downtrend target was near 3,150.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia-China Business Council. The writer owns China stock and index ETFs
