February 17, 2020

Given that the tariffs are still in place, that Phase I of the trade deal only hit a pause on the trade war, it is safe to say that the trade war is not over. Add to this the equivalence we made regarding the impact of the Corona Virus on the exchange rate, i.e. the flight to quality and it is easy to conclude that these events have elevated the foreign exchange value of the dollar. The appreciation should reverse once the virus is controlled and a trade armistice is signed. Our analysis yields some interesting investment implications when the dollar appreciation reverses. . First, since the cessation of hostilities and a solution to the Corona Virus will be bullish developments, we expect the global markets to react positively to any or both of these developments. We also expect the rise above the PPP relationship to subside and return to its long run PPP with perhaps a temporary overshooting of the long run decline. , hence we look for the US dollar to decline, the relative performance of the bourses to reverse and the small cap to bounce back. The weaker dollar should favor tradable and commodities. .

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