US-China-Australia and UK-EU trade tensions could build uncertainty for currencies
Reading this content will help you understand:
- The key players experiencing escalated trade tensions and why.
- How geopolitical tensions can impact currencies beyond these key players.
- What currencies to watch in the coming months.
US-China trade tensions are building again as the two superpowers fail to see eye-to-eye on an ever-increasing number of areas, which is expected to feed through to the performance of currencies most affected by the fallout.
Trade tensions had eased to some extent after the signing of an agreement which called a truce on extending tariffs back in January, which saw a temporary end to open hostilities between the two countries. However now there is growing concern about the relationship between not just China and the US, but Australia too.
US-China tension continues to escalate
President Trump’s rhetoric around COVID-19 has increased tensions with China1, however there are many other ‘flash points’ between the two countries.
Isaac Figueroa, OFX Treasury Dealer, said: “There are flaring tensions between the U.S. and China over different issues including how the pandemic is being managed and the race for military supremacy of the South China Sea. Beijing recently announced sanctions against US Senators Marco Rubio and Ted Cruz in a largely symbolic move after the US sanctioned a top member of China’s ruling Communist Party and three other officials over alleged human rights abuses in Xinjiang.”
In yet another example of the escalation, the White House also ordered a Chinese consulate in Houston, Texas to close over concerns of economic espionage. This was almost immediately followed by China ordering the US to close its consulate in Chengdu2. Other measures include the expulsion of foreign correspondents and visa restrictions3.
Already tense US-China relations have worsened, and this will potentially hit currencies. The Australian dollar and New Zealand dollar have the potential to bear the brunt of any downturn in China’s fortunes. Negative impacts could also hit other commodity currencies such as the Canadian dollar. The Japanese Yen could become the best performer again in case of more uncertainty and if investor risk appetite wears off and safe haven demand increases.
Australian economy hit by Chinese retaliation tariffs and import bans
Australia has also suffered some direct economic hits from China in recent months, particularly after Australia’s Prime Minister Scott Morrison called for an investigation into the COVID-19 outbreak4 in April. There has since been a Chinese ban on Australian beef imports5, and China put 80.5% tariffs on Australian barley in May which hit more than A$1-2 billion a year of exports6. Both moves, along with restrictions on Australian coal imports7are likely to be highly damaging to the Australian economy and could ultimately weaken the Australian dollar.
China is Australia’s largest export destination and if tensions between the two countries and with the US continue, demand for exports could wane. Michael Judge, OFX Head of Australia and New Zealand, said: “China occupies more than 30% of Australia’s export market with 24% of that market accounted for by China’s demand for iron ore. Trade tensions and economic weakness will heighten demand related concerns.”
Whilst trade tensions are a concern for the currency, for now, the Australian dollar has surged. Hamish Muress, Senior Manager, said: “The Aussie dollar has been flying high recently, finally breaking the 0.70 level against its US dollar counterpart for the first time in 15 months. Importantly, this wasn’t just a short-term break but instead the Aussie dollar looks like it has consolidated and held this significant level.”
UK-EU trade agreement still uncertain
Remember too there is still no trade agreement between the UK and the EU, even though the transition period ends on December 31, 2020. A trade agreement at this stage is looking unlikely8, but there is always a chance a last-minute deal could be put in place in September, which would just about give the EU and UK time to ratify it before the transition period ends9.
Without a trade agreement in place before the end of the transition period, the UK will fall back onto World Trade Organisation (WTO) tariffs, which would compound already painful economic conditions. WTO tariffs are significantly higher on many products than the current EU tariffs which average around 2.8% on products that are non-agricultural10.
At present, the UK enjoys tariff-free trade with the EU11 as well as goods and services transported within the EU – which until the transition period ends includes the UK even though it officially left on January 31, 202012 – will cross borders without the need for checks13. Without a trade deal in place before the end of the year, this frictionless transportation of goods is likely to end.
This could result in increased costs for both consumers and exporters14, which would not be good for either the UK or EU economies, especially in the wake of COVID-19.
What to watch
Any downturn in China’s fortunes could prompt a fall in the value of the Australian dollar and this is the fear if US-China and Australia-China tensions continue to escalate. This correlation was seen at the start of the COVID-19 pandemic when China was first in lockdown.
While a low Australian dollar is usually good for exports, the changed economic environment following world governments’ reactions to COVID-19 means the usual demand for products at lower prices is diminished15.
Should the EU and UK fail to make a deal by the deadline, the UK will be significantly disadvantaged by additional cost and time to trade with the EU. Progress in negotiations will become even more urgent in the coming months, any news will have the potential to cause gains or losses for the pound.
Further, if we see further COVID-19 outbreaks and lockdowns reinforced as they are locally in some countries, such as the UK16 and Spain17, then the additional strain on regional economies – not to mention national economies now the UK, for example, has insisted all travellers from Spain go into a 14-day quarantine on arrival in Britain18 – could exacerbate any trade tensions elsewhere.
With all this uncertainty, there is likely to be concern among those looking to move money to or from Australian dollars to US dollars, or from the pound to the euro. For now, if you're looking to make international money transfers, speak to an OFXpert to find out the latest market information to stay informed.
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