Tensions between both China and the US is garnering attention financial markets again.
We are seeing tit for tat sanctions between Beijing and Washington with the latest headline, China to implement sanctions on US officials, entity over Hong Kong in retaliation for the signed HK executive order by US President Donald Trump.
Meanwhile, war is a real scenario.
The Global Times reports that US Secretary of State Mike Pompeo's Monday announcement of the US' formal rejection of China's claims in the South China Sea means that Washington is no longer pretending to remain neutral on territorial disputes in the waters.
It signals the US has decided to take a clear-cut position and it wants a showdown with Beijing on the issue.
China has numerous cards to play. The only matter is whether or not Beijing wants to play them as it never wishes to see tensions running high in the region or deteriorating ties with its neighboring countries.
The US' latest statement may send a wrong message to other claimant countries in the South China Sea that the US encourages them to provoke China over territorial disputes and make them believe the US has their back. The truth is, when tensions escalate in the waters with even possibilities of military conflicts and regional security crises, it is those peripheral countries that will pay the highest prices. The US, after driving a wedge between China and other regional countries, will then be delighted to take a back seat to watch the scene.
Market implications
The hype is risk asset negative. AUD also trades as a proxy to the spat between the two countries.
Here is a view on USD/JPY from the NY session which takes into account the prospects of worsening friction between the two nations: USD/JPY: Bears eye 61.8% Fib, but H&S could be in the making first
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