US-China standoff trashes Australian dollar

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Friday night saw the USD come off a little and other majors rebound (except CNY):

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Commodity currencies all fell, Aussie most of all:

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Gold rebounded a bit:

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Oil too:

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Base metals began to sink:

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Big miners too:

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EM stocks were hit:

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EM and US high yield firmed:

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US bonds were bought:

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European spreads widened:

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Stocks fell:

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The big driver of the night was the escalating tensions between the US and China, from CNN:

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China has agreed to return the US underwater drone that it seized in international waters earlier this week, the Pentagon said Saturday.

“We have registered our objection to China’s unlawful seizure of a US unmanned underwater vehicle operating in international waters in the South China Sea. Through direct engagement with Chinese authorities, we have secured an understanding that the Chinese will return the UUV to the United States,” Pentagon spokesman Peter Cook said in a statement.

Details were not immediately available on when or how the drone may be returned.

Earlier, China’s defense ministry said authorities had decided to return it, but criticized the US for having “hyped up” the issue. President-elect Donald Trump weighed in on the incident, calling China’s action “unprecedented.”

Later in the day, he tweeted, “We should tell China that we don’t want the drone they stole back.- let them keep it!”
“Upon confirming that the device was a US underwater drone, the Chinese side decided to transfer it to the US side in an appropriate manner,” Chinese Defense Ministry spokesman Sr. Col. Yang Yujun said. “China and the United States have been communicating about this process. It is inappropriate — and unhelpful for a resolution — that the US has unilaterally hyped up the issue. We express our regret over that.”

The statement added that the US “has been frequently deploying ships and aircraft to conduct close-in surveillance and military surveys in waters facing China. China firmly opposes such acts and demands the US cease such activities. China will stay alert over relevant US activities and will take necessary measures to counter them.”

And that is that. The only message I took from the incident is that Aussie dollar was trashed nearly a cent. A quite useful warning of what will happen if US-China relations really deteriorate.

Sell Australia with both hands.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.