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Aussie Dollar Continues Decline Amid U.S. / China Trade War

Despite strong exports, accelerating growth, a budget surplus and 27 recession-free years, investors continue to ignore Australia as the plummeting yuen’s correlation with the Australian dollar showed its strongest correlation since records began earlier this month.

 

The Aussie, down 8 percent from February, appears to be the first victim of the U.S. / China trade war, with the Turkey crisis adding further pressure, prompting investors to move their currency holdings to the safety of the U.S. dollar.

 

According to Sally Auld, JPMorgan Chase & Co.’s head of fixed-income and currency strategy for Australia, the nation is “number one on the list of collateral damage in who really has a lot to lose if the China story goes south.”

 

“We’re a small, open economy that’s highly leveraged to trade and to China so anything that creates difficulty with global trade is bad for us by definition. It’s pretty fundamental to our economic well-being.”

 

“It’s hard to argue that we’re in the direct firing line if you look at what the U.S. is proposing or has put tariffs on. We’re just being caught up in the dollar strength at the moment. There’s no reason why we should get pounded just because the Turkish lira is belted.”

 

How Low Could the Aussie Go?

China is the leading importer of Australian goods with the Asian powerhouse’s purchases accounting for around 8% of Australian GDP. This over-reliance on the fortunes of a single nation, coupled with the country’s fairly liquid foreign exchange market, makes the Aussie ripe to suffer the declines we’ve seen over the last six months.

 

In the view of Nick Twidale, COO at Rakuten Securities, the Australian dollar is set to fall as low as 60 cents.The Aussie has been regarded as the major currency risk proxy for the APAC region and specifically China for a while now”, said Twidale.

 

“As global trade tensions persist and indeed increase, and more specifically tensions between China and the U.S., then investors will continue to look to sell the Aussie dollar.”

 

Is it All Bad News?

In a word, no. The Reserve Bank of Australia has maintained a record-low interest rate of 1.5 percent since 2016. A weakening Aussie allows for even speedier growth and a rise in inflation which could prompt policy makers to step in.

 

If the currency does fall in to the 60s and the U.S. / China trade war continues to stifle global growth, Governor Lowe and the RBA board are extremely unlikely to consider tightening monetary policy. However, if tension between the economic superpowers relaxes and Australia’s economy remains healthy, we could see the Australian central bank raise the cash rate.

 

What’s Next?

With tariff deadlines now imminent, there are whispers of a resumption of trade talks between the U.S. and China. While any improvement in relations would be welcome news to investors holding Australian dollars, the two sides seem to be very far apart at the time of writing, with the Chinese being portrayed as a protectionist regime by the U.S., and the Chinese warning the U.S. that they are willing to “fight to the end”.

 

 

Disclaimer:
This article is for educational and informative purposes only and should not be considered as investment or trading advice.

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