Morgan Stanley: Trade war to end, Australian dollar soar

Here is Morgan Stanley via Forexlive on the G2o and Australian dollar:

  • there is a reasonable probability of a constructive statement emerging or even a pause in escalation.
  • Markets would likely interpret such an outcome at the G20 as positive.
  • Absent this type of pause, though, the previously-announced tariff rate increase to 25% on January 1 would likely proceed as planned, with further implementation of tariffs on the final US$267bn of Chinese imports in 1H19 a serious risk.

-We would ultimately fade any FX moves on the back of such a pause as this is more likely to serve as a temporary respite than an outright end in escalation.

  • Fundamental disagreements between both sides suggest an ultimate de-escalation only when a further weakening in the US equity market or similar circuit breaker emerges.
  • Benign G20 outcome should boost AUD.
  • The ongoing trade tensions have been one of the main drivers of AUD weakness this year. If we extract current trade tensions and assess AUDUSD valuations by using traditional fundamental variables (commodities, rate expectations, spot rate differentials and inflation differentials), our model suggests AUDUSD is marginally below the current fair value of 0.7524. Should a positive outcome emerge from this Saturday’s meeting between Presidents Trump and Xi, AUDUSD could gravitate towards this level.
  • Despite the more than 10% drop in iron ore prices last week, which was motivated by declining margins of steel producers linked to oversupply this winter, AUD stayed relatively stable. Street estimates are converging towards a consensus of near-term stabilisation, also supporting a tactical AUD rebound. In the medium to long term, we remain bearish on AUD for reasons relating to household debt, current account deficits and wide rates differentials against the US.
  • AUD sentiment has recovered in recent weeks from contrarian low levels and a recent uptick in data (like the recent employment report) offers more attractive selling levels.
  • To this end, investors looking to position for a less benign trade outcome might prefer AUD shorts, particularly against safe haven currencies like JPY.

The scenarios sounds right to me. That said, I do not expect any agreement of substance to come from the meeting. Nor any other meeting in the near future!

Comments

  1. ErmingtonPlumbingMEMBER

    So can we expect a resumption of Chinese capital flight back into Chatswood real estate again?

  2. Perfect opportunity to short AUD at 75c
    81 to 70 back to 75s then back to 68c next year sometime as RBA cuts

  3. Does anyone really think Xi is ready for capitulation?
    From what I can see, there’s no indication Trump and Navarro will accept much less than that.

    Trump even noted that China’s not really hurting yet.

    In part, due to the slow pace of the US tariff implementation, and the command-economy of China, China’s been able to get in some hard counter-punches pretty fast. Cutting all soy beans instantly vs a lag before tariffs hit, makes it look like China’s got a better handle on it. The down side of “free markets”, hey?

    I don’t think much will come out of this meeting. Stalemate at best.

  4. The bar has been lowered so low that “a meeting” is good news.
    In any case, there are plenty of ways importers and exporters can work together to figure out how they can tariff engineer ways to get products through without too much cost. Lots of clever loop holes are being worked out behind the scenes. All tariffs are going to do is push out businesses that don’t have to resources to figure out how to get around them while large companies dance around them with ease like they do with tax and liabilities.