The AUD dropped harder and faster than other Asian currencies on Friday reinforcing its position as a liquid and flexible proxy for the Asia region. Right now the Australian economy is performing at its best in years which should be good news for the AUD, but Greg Gibbs discusses the foreboding signal the currency is sending that winter is coming
AUD the global risk barometer
Some people like "Doctor Copper" as their barometer of global growth risks, but the Aussie dollar has been a remarkably prescient sage, and it is telling us that we are approaching a snapping point in the global financial system. Doom may not be imminent or unavoidable, but the tension is tight, and is being ratcheted up.
You don't have to be a sharp observer to see that there are problems in global financial markets, Turkish and Argentinian markets are in turmoil, among a few others, but the rapid slide in the AUD in the last month is telling us the risks are spreading to the mainstream.
The dive in the AUD on Friday last week after failing to draw strength from an impressive set of GDP numbers is a sign that we should batten down the hatches.
Clear and present tariff danger
The clear and present danger is President Trump's tariffs. The market has been bracing itself for US tariffs on an additional USD200bn of goods (on top of 25% tariffs already imposed on USD50bn of goods in "industrially significant technologies").
We are still waiting on these next USD200bn of goods, but Trump knocked Asian currencies down a peg on Friday by saying he is ready to impose tariffs on a further USD267bn of goods, for a total over USD500bn, which basically means all of Chinese exports to the USA.
Nothing is certain beyond the first USD50bn in tariffs. In early August, Trump said he was considering a tariff rate on the next USD 200bn tranche of 25%, up from an initially proposed 10%. The rate, the volume, and the timing are still up in the air, but like a dark cloud, they hang over the global economic outlook, especially that of China, and the USA, whose consumers will face higher prices for many goods.
There may even be a relief rally in the AUD if Trump reverts to a 10% rate or applies them to less than USD 200bn of goods. But the market can see that Trump has set his sights on China's trade and industrial policies, and there is no easy middle ground for the two sides in this trade dispute.
The fact that the AUD dropped harder and faster than other Asian currencies on Friday is a testament to its position as a liquid and flexible proxy for the Asia region.
Australia yet to feel the pain
But before we pile into a short AUD position let’s first acknowledge that Australia has not yet been much affected by the trade dispute. In fact, the price of Australia's main exports have gone up; coal, natural gas and iron ore. Australia's trade balance is in a relatively strong surplus, mining sector profits are up significantly over the last year, Government revenue is stronger, and mining companies are even talking about new capital investment.
This illustrates that the fall in the AUD in recent weeks has a lot to do with the risks of global fallout from this trade dispute rather than a fallout due to actual damaging tariffs or lower commodity prices for Australia.
Australian external accounts in relatively good shape
Source: FIIG Securities
Australian commodity prices holding up