6th August 2019
The AUD was pushed to its lowest point in 10 years against the USD as the US/China trade war threatens to turn into a currency war with global ramifications. China's central bank made the decision to devalue the nation's currency to below 7 Yuan per US dollar for the first time "due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China".
This is bad news for the Aussie dollar which is closely linked to the Chinese economy and the Yuan for mineral exports. Just last month the Aussie dollar was pushing 70USD cents and now it’s staring down the barrel of levels not seen since the worst days of the global financial crisis in early 2009.
The AUD has also dropped against every major G10 currency and today, 1AUD will buy you:
0.6569 US dollars
68.1825 Japanese yen
0.5345 Great British pound
0.8391 Canadian dollars
0.999 New Zealand dollars
0.8815 Singapore dollars
All eyes on RBA as domestic data points to mixed results
With very little to crow about for the AUD in recent trade, economists and Aussie travellers alike will be hoping the RBA keep interest rates on hold at their policy meeting at 14:30 this afternoon. The RBA is widely tipped to leave interest rates unchanged with a view to seeing how other domestic and international data pans out before another rate cut.
However, the RBA may push the Aussie down simply by its economic reasoning due to be released by warning that the global economy and domestic conditions are pointing to further rate cuts down the road. The RBA usually keep their cards close to their chest so it would be surprising for them to go in so openly on their position, but these are strange times. The RBA could also help the AUD/USD exchange by having a more positive outlook on the domestic economy and playing down further rate cuts, but this scenario is also unlikely.
With recent domestic retail results coming in weaker than expected over the long term with growth over the last 12 months weaker than during the GFC, matching the snail’s pace seen in the early-90s recession, it’s likely the RBA will still hit upon the need to raise inflation and lower unemployment to that magic 4.5% mark. This scenario is unlikely to have too much of an effect either way on currency markets as that’s already understood pretty clearly and well built in to prices.
In a negative development for Australian trade and the Aussie dollar, China's retaliation to US tariffs has had immediate detrimental effects to the Australian economy and US share markets – the devaluation of the Yuan makes imports of Australian iron ore dearer and stocks involved in international trade and technology have been hammered this morning.
For the short-term, the RBA holds the key to AUD performance along with Donald Trump and his next move in the trade war. If the tit-for-tat continues, the only way is down for business and consumer confidence along with the AUD.
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Brexit keeps the handbrakes on GBP as EU and Boris bicker
EU Brexit officials have lamented that “we are back where we were three years ago" in the Brexit negotiation phase after they were told the UK will leave without a deal unless major changes are made to Theresa May's agreement. Mind you, these are the same plans that were voted down by British MPs three times before Theresa May stepped down.
Further complicating the make-up of the new UK Parliament is the increased risk of a No Confidence motion against the government after UK Prime Minister Bojo’s majority in the House of Commons was reduced to just one. If Boris can’t keep a hold of his own Parliament, he may find organising a stable Brexit a bridge too far.
An EU Brexit negotiator told sources that the upcoming G7 summit in France at the end of August could mark the point where a no-deal Brexit becomes inevitable.
With Brexit negotiations going down like a lead balloon and time running out before the October 31st deadline, a no-deal scenario is looking more and more likely, and markets don’t like it. The GBP has been in a tailspin since Brexit dramas ramped up earlier this year and it’s likely to keep pushing lows against the USD and give the AUD a bit of wiggle room as it sorts out its own dramas for now.
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Trade war heats up as Trump accuses China of weaponising the Yuan
US stock markets have been the biggest loser in the latest escalation of the US/China trade war, with The Dow Jones having its worst day of the year, and the NASDAQ (made up of technology companies that will be most hurt by the trade war) hitting its longest losing streak since 2016.
The latest escalation started when Trump proposed last week adding a further 10% in tariffs on $300 billion in Chinese imports from Sept. 1st, just as the 2 countries were preparing to re-open trade negotiations in Shanghai.
China responded to President Donald Trump’s tariff threat with another escalation of the trade war on Monday, letting the Yuan tumble to the weakest level in more than a decade and asking state-owned companies to suspend imports of U.S. agricultural products.
Of course Trump responded like any great World Leader, he tweeted - “China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
So basically at this point we have 2 brothers pushing and shoving each other harder and harder each time until someone ends up with a bloody nose and in tears.
Stocks and emerging-market currencies shudder at the thought of ongoing trade conflict between superpowers and the latest round of escalations will weigh on global economic growth and rumblings are growing louder the Federal Reserve might even follow up last month’s rate cut with another.
Global traders and foreign exchange markets around the world will be watching each country’s next moves very closely as the USD maintains its strength as other currencies falter with the uncertainty. Jump on Twitter to see what Trump has in store next and follow the currency fluctuations through our blogs to stay on top of where the AUD is at.
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