Aussie dollar feels the fallout
China, Turkey add to risk of a further drop
Investors have brushed aside Australia’s world-beating economic growth to make its currency the whipping boy of the trade war. Down 9 per cent against the US dollar in the past six months, the Aussie dollar’s correlation with the tumbling yuan has been the strongest on record this month as investors entwine the two nations’ fortunes. It’s a clear sign of Australia’s vulnerability to a slowdown in China that is being exacerbated by US tariffs.
If that wasn’t enough, the Aussie is set to remain under pressure as the crisis engulfing Turkey drives a flight to safety and the US dollar.
“We’re No 1 on the list of collateral damage in who really has a lot to lose if the China story goes south,” said Sally Auld, JPMorgan Chase & Co’s head of fixed-income and currency strategy for Australia.
“We’re a small, open economy that’s highly leveraged to trade and to China so anything that creates difficulty with global trade is bad for us by definition.”
Australia’s currency is under fire as the economy caps a 27th recessionfree year amid accelerating growth, robust exports and the Government eyeing its first budget surplus in a decade. Fear has become the main driver: China buys more than a third of Australia’s exports, equivalent to about 8 per cent of gross domestic product. That, combined with Australia’s liquid foreign exchange market, makes the currency an ideal target.
How bad could it get? Rodrigo Catril, a currency strategist at National Australia Bank in Sydney, says it’s “not unreasonable” to see a level below US69c if there’s a spike in volatility and commodity prices drop. Nick Twidale, chief operating officer at Rakuten Securities Australia, reckons the Aussie will trade below US70c by year’s end, and potentially as low as US60c in the longer-term.
The currency was yesterday trading around US72.3c.
A weaker currency is welcomed in some quarters. The Reserve Bank of Australia has kept interest rates at a record low 1.5 per cent for two years, with some economists seeing it staying there for another two. A fall in the Aussie opens up the possibility of faster growth and inflation that could spur policy makers into action — but the context will be important.
If the currency sinks into the 60s against a backdrop of a trade war that’s hurting global growth, it’s unlikely to encourage governor Philip Lowe and his board to consider tightening policy. But should such a move happen in a strong global and domestic environment, that could change the equation.
“The Australian dollar is a risksensitive currency,” said NAB’s Catril. It “remains vulnerable to the increasing probability that we will see an escalation in US-China trade tensions.”
Australia and its currency have often been seen as a barometer for the global economy.
Former Federal Reserve chairman Alan Greenspan said he often looked Down Under for an indicator on the US economy.
Even as the world lumps Australia in with China, direct hits from a trade war aren’t being felt in Sydney. China dominates Australian shipments of iron ore to produce steel, and it also fuels growth in its education exports.
“It’s hard to argue that we’re in the direct firing line if you look at what the US is proposing or has put tariffs on,” said JPMorgan’s Auld. “We’re just being caught up in the dollar strength at the moment. There’s no reason why we should get pounded just because the Turkish lira is belted.” —