Pressure is mounting for the Aussie.
Taking the markets in this morning I began to reflect on the growing pressure that the Australian Dollar is facing from China's industrial production falls. On Thursday jobs data for the AUD will be released and on Friday Governor Lowe will go into parliament to speak. Pay particular attention to Friday. The close relationship between Australia and China is liable to create pressure for the Australian dollar as tariffs take their impact on Chinese production. Aussie's GDP consists of around 30% from Chinese exports. Recent production data this week has been a miss for China, see here. Production was down too in July's (16th production reading; 6.0% YoY vs 6.5% expected. Their trade surplus narrowed this month as well; 177bln from an expected 229bln. Copper prices are now at yearly lows (see below), all weighing further on AUD.
From a geopolitical perspective China's economy works on a very simple maxim. If we produce cheaply for the world, the world will buy from us. That's the deal. Tariffs risk harming that status quo. Altering that balance risks Chinese unemployment. The Chinese authoritarian government have an unofficial deal with it's people. We bring you prosperity and growth , you do what we say. It's commonly known as the 'Golden rule'. He who has the Gold makes the rules. If growth halts, unemployment grows then that deal is at risk of capitulation from one or both parties. Internal unrest is not something the Chinese authorities will want and China will want this 'war' to end as it is hitting at the core of their economy; cheap world production.
As I have already posted, I took profit on my AUD/JPY shorts last week, and I am now looking to add to them here. See post.
So, watch this space. In particular I will expect these tariffs to start weighing further on the AUD. I wonder if Lowe will mention the impact on US trade wars with China on Friday? So, the key takeaway from this post is to be alert for the AUD to be further impacted and that to translate into the RBA's rate path. Things can get worse. Also, conversely, a withdrawal of US/China tariffs will likely see a relief rally in the AUD. Or, will we get an unexpected turn and we see more of a direct challenge from China. Will the dragon enter the fray?
