Trade Wars ? US reports China To The World Trade Organisation ? GBP USD Exchange Rate Under Threat?

Published: Tuesday, 18 September 2012 09:00 BST - Written by David Woodsmith

STORY LINK Trade Wars ? US reports China To The World Trade Organisation ? GBP USD Exchange Rate Under Threat?

Yesterday’s session saw another of the world’s largest central banks announce a loosening of monetary policy in an overt attempt to kick-start its domestic economy. This time it was the Reserve Bank of India announcing a measure aimed at getting funds flowing from the country’s retail banking sector into small businesses and to private individuals. In a move mimicking the recent actions of the People’s Bank of China, India’s central bank announced that it would be lowering the liquidity ratio of its banking sector, meaning that the state’s banks now had to keep a lower percentage of funds on account as liquid assets.

Ordinarily, the market would welcome such direct action by the reserve bank of such a significant economic power, however yesterday was marked by the return of ‘risk-off’ trading in global markets. The main contributory factor to this was political horseplay in the US regarding the nation’s long-standing trade dispute with China. With a presidential election due in the next few months, current White House incumbent Barack Obama’s announcement that he had reported China to the World Trade Organisation for paying illegal subsidies to private companies in its giant automobile manufacturing sector, provided his rival Mitt Romney with ammunition to go on the offensive. Republican nominee Romney didn’t pass up the opportunity, accusing Obama of weakness on the issue. Either way, the threat of an escalating trade war between the world’s two leading economies was sufficient to take the edge off global risk appetite, triggering a renewed move out of the Australian and New Zealand Dollars. This sent the GBP AUD exchange rate back through the 1.5500 level, while the GBP NZD exchange rate briefly traded above 1.9700 for the first time in a week, during last night’s Asian session. Up to this point, the GBP USD exchange rate has remained at the top of its five month range, in spite of the downward move for equities. However, a dip back below 1.6000 looks possible for the GBP USD exchange rate sooner rather than later if the America/China stand-off continues to provoke a flight to safety.

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