Trump said yesterday that COVID-19 reparations are coming.
US will bill China at least $160 billion as damages due to ill warned corona virus impact.
The dictionary meaning of word reparations is as follows:
The action of making amends for a wrong one has done, by providing payment or other assistance to those who have been wronged.
Apart from a genuine, punitive reason to fire China, we perceive that US politics also got to play a major role, here.
Trump has failed to manage Corona virus (on the human side) as effectively. His policies on the matter did not prove fruitful and a lot more people in US have lost their lives.
Mind it, that, this is an election year in US. To make his foot firm on the political landscape he has to garner support of the general public. He would like to emerge as a leader who took on China, with whatever might he could.
Now once he asks China to pay the bill for damages, China surely won’t. China will also vehemently deny the charges against in with respect to intentionally hiding information and accelerating the pandemic, worldwide.
Now once China fails to pay and Trump has already said that China has to pay, it will put a big question mark on President of US, if he fails to enforce payment from China.
So then what option Trump will have to prove his superiority or to bring Chinas wrongdoing to justice?
He would
Either increase tariffs to say 50 percent and make the trade war a mission impossible
Or
Put economic sanctions on China barring countries from trading with China
The impact being that China would lose export revenue.
Hence Trump would prove his superiority into punishing China either way. He would thus try to win electorate in his favour.
What would be the timing for all this?
Exactly pointing out the timing will be a bit difficult. Trump started it by saying “China Virus” and now he has proposed inflicting punishment via reparations. We at Vidyut Mudra have a belief that he will build the rhetoric further, gradually, one at a time, once the Coronavirus situation starts improving in US.
He has been weakened now to take a drastic action against China, as an immediate attack will make him look like more of a politician, than a humanitarian. He would ideally wait and try to project a picture first as an able administrator of the virus and then launch a full blown attack on China.
Hence we have a belief that by June or July 2020 when the humanitarian impact or loss of life due to Coronavirus will be lessened, Trump will activate a time bomb of deadlines, with various expected deliverables, against China.
That will be the time when the world will be happily recovering from Corona virus. Equity markets would be recovering and emerging market currencies would have appreciated, at least half way through.
At that time, by June/July 2020, we would expect that rupee would have appreciated to levels to the likes of 73.80 to 74.20.
This is where we would expect the downward journey to start again. This is when Trump will fiercely spring into an action against China, trying to pull along Europe in his fight.
The equities would crash again and the impact would be more severe than Corona virus. With the world economy already reeling over economic losses from the Virus; Trumps attack on China would be a double whammy.
We would see rupee move again towards 77, rapidly. And some time later, breach 77 and head further down to 78 by October 2020.
Hence we feel importers should cover for up to 6 months at levels between 73.80 to 74.20; whenever they are seen in the next 3 months.
Hence as of now, we advise importers to hedge up to June 2020, only, and that too in small lots, at opportune moments (strong resistance levels). The idea is averaging of exposures to optimize rates. Importers should not hedge aggressively wrt the exposures due beyond June 2020.
We also advise exporters to cover, now, near term, up to June, more rapidly, at levels above 76.
With these developments, expected to happen, and presuming that exporters are hedged sufficiently to the extent of 40 to 50 percent for FY 2020, as of now, we would advise that exporters, should further break down hedges into smaller parts. Ideally 30 percent of the export exposures due in 2020 shall be to take advantage of depreciated levels post August 2020.
Note-The entire view as above may move a month up or down, depending on how fast paced or slow the actual event turns out. In case the view changes due to certain unseen circumstances, we would keep your updated.