AUD set to slide further
(12 September 2018 - Australia) The Australian dollar downtrend is expected to become further entrenched in the wake of global trade tensions and the latest US jobs data, already falling over 12 percent against the US Dollar since January 2018 from above 80 cents to now sit narrowly above 70 cents.
The Aussie Dollar fell more than one percent after President Trump asserted that the US government was looking beyond the current US$200 billion worth of Chinese goods in line for an imminent tariff treatment to a further US$267 billion. If the Trump administration does move forward and imposes the expanded tariffs, in addition to the previous US$50 billion basket of goods, a consensus of Chinese goods traded with the US would be included. For US dollar-bloc countries and ‘commodity currencies’ such as Australia and Canada where the currency is increasingly traded as a proxy for China's economic strength and weakness, the currencies are ‘pushed around’ to an extent and volatility is expected to rise. East & Partners forecast currency research based on direct interviews with 2,363 importers and exporters sees CFOs and corporate treasurers pricing in a further slide to 68.2 cents by the end of 2018. Small businesses are notably more bearish than their middle market counterparts.
From June to the first week of August, the AUD/USD traded near 74 cents and has continued to depreciate ever since. The Aussie Dollar last traded below 70 cents in Q1 2016 and is currently trading narrowly above 71 cents. Goldman Sachs is processing the implications of the next phase of Trump trade war as tariffs mounting to US $200 billion by lowering expectations for Chinese growth, triggering a general decline in risk tolerance and therefore weakness in riskier currencies and by factoring in a general weakening of the Renminbi against the US Dollar. Each of these outcomes have vastly differing implications for currency markets. A broader pullback in risk assets affects most of these currencies also, but also other risk-sensitive emerging market exchange rates with smaller economic links to China. In contrast, Renminbi depreciation affects a different set of currencies, notably Asian exporters that compete with China. Two currencies that are particularly notable are the Korean Won and Japanese Yen which tend to depreciate alongside Renminbi weakness but appreciate in times of falling global risk tolerance.
The Trump Administration has expressed displeasure with USD strength, particularly against the Renminbi, and the PBoC has taken active steps to stabilize the Renminbi. In Goldman Sachs view this implies that the “Renminbi devaluation” channel will be less significant with the RMB/USD remaining stable or depreciating only very gradually. Market sentiment around emerging market assets has become much more fragile and this might imply that spill over to emerging market currencies outside of Asia could be more meaningful. NAB technical analyst David Coloretti said the downward trend in the Aussie appeared sustainable, based on how it ended the month of August, leading him to lower the bank’s forecast to 70.5 cents over the next month and to 69 cents over the next three months. BlackRock's chief global investment strategist Richard Turnill said he expected the market outlook to remain murky in the short term because there were so many conflicting messages. "We believe investors are seeking resilience as they adjust to heightened economic uncertainty and moderately tighter financial conditions, partly reflecting rising trade tensions and a firmer US dollar. Portfolio resilience is important because there are few indications that the US and China are close to a reconciliation on trade disputes. We do not see either side willing to compromise. That uncertainty reinforces the Aussie's downside risk.”
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