A full-blown trade war between China and the United States has not yet broken out and may yet be avoided but there is a whiff of grapeshot in the air. For markets, such an atmosphere does not lend itself easily to an appetite for risk, instead fostering a demand for safe havens.
That should spell volatility for the currencies of Australia and Japan. The Australian dollar could struggle if a few opening salvoes between Washington and Beijing turn into a China-US trade war, given the importance of China as an export destination for Australia.
No one should underestimate the cross-border economic links between the two nations.The Australian Trade and Investment Commission (ATIC) made the point in December that for the 2017 financial year roughly 66 per cent of all Australian exports of goods and services were sold to East Asia “with almost 30 per cent going to China alone”.
“The direction of exports is still [nearly] all about China,” the ATIC wrote.
Additionally, within the important raw material export space, the ATIC noted significant rises in the value of Australia’s exports of both thermal coal and iron ore. In both cases the commission attributed those rises in part to demand linked to strong growth in Chinese steel production.
More generally, Australia’s reliance on coal and iron ore exports for use in global steelmaking only reinforces the prospect of Australian dollar vulnerability in a situation where, specific China-US trade tensions aside, US President Donald Trump has already announced tariffs on steel and aluminium imports.
The subsequent decision to give Australia a temporary exemption from those tariffs is irrelevant. Australia is neither in the top 10 nations who export steel to the US nor in the top five of those who sell aluminium to the US.
But if the Australian dollar may be vulnerable in an unfolding scenario of heightened international trade tensions with China-US trade differences at their core, the Japanese yen might be sought after even though, as of Friday, Japan’s steel exports to the US were still subject to Trump’s tariff plans.
That might seem an inconsistent view but from a currency market perspective, the Australian dollar would likely be regarded as a risk asset, in the past having been seen by the currency market as a quasi-play on China.
The bottom line is that the higher the trade tensions between China and the US, the more the currency market will seek to pre-position itself for what it collectively sees as the likely currency consequences.
Source: South China Morning Post
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