US: Politics setting the tone – Rabobank

Piotr Matys, EM FX Strategist at Rabobank, notes recently China’s navy seized a US naval drone in international waters in the South China Sea and while Beijing pledged to return the drone back to the US, President-elect Donald Trump tweeted that “We should tell China that we don't want the drone they stole back - let them keep it!” 

Key Quotes

“Given that Mr Trump is yet to be inaugurated, Beijing will maintain a fairly measured approach to such provocations, according to the Global Times, which is often used by the Communist Party to express its views. However, “this attitude won’t last too long after he officially becomes the U.S. president, were he still to treat China in the manner he tweeted today.” Essentially, China sent a warning signal that if Mr Trump continues to use somewhat provocative language, Beijing will respond with potentially harsh measures. It remains to be seen whether Mr Trump will soften his tone when he moves to the White House. Based on his previous remarks it is reasonable to assume that the relationship between the US and China will be completely different under Trump’s presidency, which may have serious implications for the markets due to potentially significant changes in global trade policies and geopolitical risk.”