Why the Aussie is experiencing a fallout from the global trade war
Here’s a breakdown of the latest in the US-China trade war negotiations and how the Australian dollar (AUD) and the US dollar (USD) are performing on the back of these developments.
Hopes that the US-China trade war would be coming to a resolution have been dashed as President Trump confirmed additional tariffs are set to be imposed on additional Chinese imports, while China has said it will retaliate with tariffs on US$75 billion of US products coming to the Communist nation.
The latest 10% tariffs will be added on another US$112 billion of Chinese goods from September 1, with further tariffs on US$160 billion of goods added on December 15 – the latter being delayed to avoid peak retail shopping seasons, and ensure the majority of consumer goods, such as toys, smartphones, clothes and shoes, are in the country before the tariffs come in.
By the time the December tariffs are added, the average rate will have reached 21.4%. With China’s retaliatory tariffs on US goods, there shows little sign of the trade war ending anytime soon, and the consequential fallout from the world’s two biggest economies slugging it out is being keenly felt elsewhere.
What impact is this having on the US dollar?
With stock markets falling in recent weeks and many signs that the world’s largest economy is facing a possible recession in the not-too-distant future, the US economy is feeling the pressure. A phenomenon known as an ‘inverted yield curve’ where two-year bond rates are higher than those paid on 10-year bonds is a key indicator of recession and was seen in US bond markets numerous times on Friday (August 23) as President Trump ‘ordered’ US companies to avoid trading with China.
Strong US dollar means great terms for those transferring to relatively weaker currencies
There has been a noticeable flight to safety in currency terms, with the traditional safe havens – the Swiss franc, Japanese yen and the US dollar, which is still considered the main safe-haven currency even though most uncertainty is being caused by the country’s own President – all strengthening in recent weeks.
For those looking to move their money from US dollars, a strengthening of the currency means they will get significantly more for their money.
For example, if you’re transferring US$10,000 to Australian dollars;
- The interbank exchange rate of AU$1.4428 at the end of May could have resulted in AU$14,428
- The US dollar strengthening to AU$1.4940 on 26th August 2019 could have resulted in AU$14,940 – an extra AU$512 within a matter of weeks
- The picture is similar against a host of other currencies as the US dollar continues its march higher versus other units such as sterling, euro and New Zealand dollar.
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What impact is this having on the Australian dollar?
If you are in Australia, there is enormous pressure on the Australian dollar at present thanks to the devaluation of China’s yuan. The country devalued the yuan to less than Yuan7 to the US dollar, which prompted President Trump to further label the country a currency manipulator, which causes further problems for Australia. The move is a clever one for China, since it effectively reduces the impact of any tariffs on Chinese goods being imported to the US as they will be cheaper because of the relative weakness of the yuan to the US dollar.
However, it is bad news for the Australian dollar and the New Zealand dollar, because when the yuan weakens, these two currencies tend to follow suit. So much so that the Australian dollar is being quoted as collateral damage in the trade war.
Australian exports to China become more expensive
Australia’s exports to China, particularly of iron ore and coal, hit the second highest level on record in June this year. The concern is that a devalued yuan means exports to its one of its biggest trading partners are now more expensive, threatening the Australian economy.
The Australian dollar is at a crossroads
While the two global economic superpowers slug it out, there is a very real fallout for other countries exposed to either of these key economies. In Australia, the key ASX200 fell for five consecutive days at the beginning of August, to levels not seen since June this year; a direct result of its awkward position as a key trading partner of China, but a strategic ally of the US. However, the market has been saved somewhat by it reaching a high not seen since 2008 just prior, meaning the fall was a correction more than a rout.
As a result, the Australian dollar is being squeezed in two directions which could prove costly for customers moving Australian dollars to US dollars, whether for business or personal transactions. The expectation is that the Reserve Bank of Australia will also make a 0.25 of a percentage point cut in September, and this has already been priced into currency markets.
At the time of writing, the Australian dollar was staying stubbornly below the US$0.68 level, which was last seen on August 8, and while the volatility in world economies and world currencies continues, we are unlikely to see any significant progress in the strength of the Australian dollar.
What should Australian customers do?
For Australian customers or businesses who need to move US dollars overseas, now could be the time to talk to a currency specialist to discuss how you can protect your transaction, perhaps by fixing your exchange rate for up to a year to protect you from future fluctuations, or setting a target rate, so your transaction occurs automatically for you when rates hit that level.
Our specialists can also give you guidance on where the Australian or US dollar may be heading, so you have the most up-to-date information when you are making decisions about your transactions.
If you need to move money overseas and want to know how to make the most of your currency transactions, speak to the OFX team. With global offices, there is someone you can talk to 24/7.
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