Another big slide in the Mexican peso suggests that investors are again fearful about trade wars. The currency dropped almost 2 per cent on Tuesday, putting it back above the 20 mark against the dollar to levels it has not touched since early 2017.
Yet judging by the limited number of markets affected by the escalation in trade tensions, investors have largely refused to allow Donald Trump’s protectionist policy to shape their behavior.
Since the US president’s election in November 2016, the peso and the Canadian dollar, which also fell heavily on Tuesday, have periodically taken hits from concerns about the demise of Nafta, the trade agreement between the US, Canada and Mexico.
The price of steel and aluminum has risen markedly as the US threatened, then imposed, tariffs on these commodities.
But trade tensions have left a lasting mark on little else. It is a wonder that stock markets have proved so resilient, says Rabobank analyst Jane Foley, since a trade war has “the potential for being enormous if it runs to full steam”.
There is no shortage of theories for the relative calm in markets. Some investors, savvier now about Mr. Trump’s approach than in the early days of his presidency, think trade rhetoric and tariffs are part of his negotiating tactics to extract concessions.
Others look at the sum total of tariffs imposed and conclude they amount to just a fraction of global trade overall.
The question of how to trade protectionist worries is more vexed than it looked. Selling the peso and the Canadian dollar on anxiety over the demise of Nafta fears look straightforward, says Derek Halpenny of MUFG, but more global protectionist fears are “not exactly easy to trade”.
For all the calm, there are two reasons to guard against complacency on trade. First, it is having a more insidious impact on emerging markets.
Investors talk a lot about it and there may be little tangible effect, says Kit Juckes at Société Générale, but one outcome is “a generally downbeat view of EM”.
Second, the backdrop is less benign. Last year, US protectionism was being promulgated at a time of low market volatility and rising global growth. This year, volatility has risen and the growth story is less clear.
As Mr. Trump heads for a frosty meeting of the G7 this week at which trade tensions will be unavoidable, markets have reason to begin to feel jumpy.
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