Australian dollar feels trade tension impact

04 July 2018

In recent weeks, the Australian dollar has been an unfortunate spectator in the ongoing protectionist trade policy arm wrestle between the US and China.

The Australian dollar’s decline has been sustained since the end of January but has accelerated further – falling US3.2¢ throughout June – underpinned by the aforementioned trade tensions and domestic economic outlook. At present, the Aussie dollar finds itself firmly caught between a rock and a hard place, currently trading at US74¢.

The rock

Global trade tensions present a major threat to a recovering world economy, particularly as the two largest economies go head-to-head in a battle to protect domestic trade interests – albeit the US appears to be the driving force.

The Australian economy is heavily reliant on commodity exports across a variety of industry sectors. Therefore, the performance of broader global economies creates a highly sensitive backdrop for the demand and prospective prices of such commodities. Escalating international trade dynamics have been a prominent factor unsettling major stock exchanges recently, particularly Asian markets and specifically Australia’s largest trading partner – China.

Therefore, the Australian dollar can often be a proxy for economic performance in China. China’s stock market has now fallen – 20% since January – close to levels not seen since the Chinese stock market crashed in mid-2015 until early 2016. During this time, the Australian dollar reached its lowest levels against both the US dollar (US68¢) and Chinese Renminbi (CNY4.39¥) since the global financial crisis.

The Australian dollar has a little further to fall against the respective currency pairs before these levels are reached, however the downwards trend looks ominous. Further to trade tensions, the US dollar continues to strengthen, buoyed by low unemployment rates, steady job and wage growth.

The hard place

The performance of the domestic economy has also been a limiting factor for the Australian dollar. Record levels of public and private debt, low interest rates and stagnant wage growth amongst a few indicators have overshadowed a 1% growth in GDP for the March quarter.

The Reserve Bank of Australia (RBA) as of 5 June left interest rates unchanged at the historic low of 1.5% for the 20th consecutive meeting. Inflation is still not meeting the 2–3% target rate the RBA looks to achieve before interest rate hikes are considered. June quarter inflation data will be released on 25 July; however, the market sentiment concludes that the prospect of interest rate hikes this year are now extremely unlikely.

Global demand for red meat and in particular Australian red meat remains extremely robust and the downward trend of the Australian dollar will lend support in our export markets. However, Australian agriculture will not be immune from the broader implications of global trade tensions, positive or negative.

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