Australian dollar belted again as Trump breaks China

See the latest Australian dollar analysis here:

Macro Afternoon

DXY is off and running again as CNY and EUR come apart:

The Australian dollar was belted across DMs:

EM forex was even worse:

Gold was hit:

Oil spiked on Iran worries:

Metals were flat:

Big miners mixed:

EM stocks barely held on:

Junk bifurcated with US rising and EM falling:

Treasuries were sold:

Bunds were bought:

Aussie bonds too:

That aided the stock rebound:

All US data was good with Philly Fed strong (charts from Calculated Risk):

Housing starts and unemployment claims better than expected:

Plus, coming down the pipe is tariff-induced inflation which adds more pressure to DXY:

Not that it matters. It will be swamped in due course by the massive deflation emanating from China as the CNY falls. And it is one-off hit anyway, not some self-feeding cycle. The Fed will look through it.

So, US growth is slowing but still OK so long as stocks hold up. But on the other half of the trade war, Chinese growth is not OK and its options are far more limited than it appears. Bloomie puts a brave face on it:

Beijing’s main defense against trade-war fallout this year is more likely to come from the finance ministry than the central bank, no matter what President Donald Trump says.

If tariffs begin to really hurt China’s growth this year, there’s plenty of direct fiscal firepower left to stoke the economy before the People’s Bank of China would have to cut interest rates, according to an analysis of government spending by Bloomberg. Data released Wednesday showed an across-the-board slowdown in April.

Central and local authorities in China have at least 25.1 trillion yuan ($3.65 trillion) unspent in their budgets this year, data compiled using official budget plans show. That’s two trillion yuan more than the ammunition China had in the same period last year — and about equivalent to the entire annual output of Germany.

Poor economics as usual. All that matters to growth is how much Beijing has in reserve versus last year, not the total. That’s not 25tr yuan, it is 2tr yuan, or roughly $290bn, 2% of GDP. Useful but not game changing. As well, spending it only accelerates China’s drive into debt-trap stagnation, the only escape from which is to not spend it and reform for higher productivity growth instead, via value-added manufactures. Which brings us to this, also at Bloomie:

The White House on Wednesday initiated a two-pronged assault on China: barring companies deemed a national security threat from selling to the U.S., and threatening to blacklist Huawei Technologies Co. from buying essential components. If it follows through, the move could cripple China’s largest technology company, depress the business of American chip giants from Qualcomm Inc. to Micron Technology Inc., and potentially disrupt the rollout of critical 5G wireless networks around the world.

“The Trump administration action is a grave escalation with China,” Eurasia Group analysts Paul Triolo, Michael Hirson and Jeffrey Wright wrote in a note. If fully implemented, the blacklist would “put at risk both the company itself and the networks of Huawei customers around the world, as the firm would be unable to upgrade software and conduct routine maintenance and hardware replacement.”

The threat is likely to elevate fears in Beijing that President Donald Trump’s broader goal is to contain China, leading to a protracted cold war between the world’s biggest economies. In addition to a trade fight that has rattled global markets for months, the U.S. has pressured both allies and foes to avoid using Huawei for 5G networks that will form the backbone of the modern economy.

In short, Trump is cutting Chinese development off at the pass.

If growth slows, Beijing can’t liquidate Treasuries to spend at home without spooking the currency. It can’t cut interest rates without spooking the currency. It can build some more empty apartments and accelerate its own decline.

All roads lead to a lower CNY and that, my friends, means a still lower Australian dollar.

David Llewellyn-Smith is Chief Strategist at the Macrobusiness Fund and MacroBusines Super, which is long international stocks to benefit from a falling AUD, so he definitely talking his book.

David Llewellyn-Smith
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    • kiwikarynMEMBER

      Don’t you love how everything is blamed on climate change these days. No mention of the real culprit – disease. Maybe the Govt can implement a new Koala Levy to pay for whatever climate change taxes pay for? Or something more useful like actually curing chlamydia? Although if they cured the disease and increased the population, it would be rather embarrassing to all those who claim the koala is going extinct from climate change, so to keep with the narrative and avoid losing face, koalas must continue to die.

      • bolstroodMEMBER

        Loss of habitat thru clear felling of state forests and massive land clearing also implicit in Koala demise.
        As they go ,so go we.

      • drsmithyMEMBER

        Bolstrood is correct. Suburbia is a rounding error compared to land clearing..

  1. Ronin8317MEMBER

    Tariff based on country of origin is very easy to bypass.

    The bigger issue is the US attack on Chinese tech companies. If Trump start imposing bans on Lenovo laptops, then it will really start to hurt. (E.g. laptop will be banned in US and confiscated at the border, for national security!!)

  2. Gosh the AUD into the 60s is probably better for the environment than climate change policy. Imagine all those that bought 6 and 8cyl and large diesel trucks during the wealth effect days, petrol is at 1.70 atm and will probably hit $2 at some stage

  3. HnH I am guessing if they ever got this sorted then the AUD will rocket back up or do you think there are more underlying issues besides the trade war now?

    • Well before the question of whether it will get sorted – is the question “what does sorted look like?”

      Things seem unlikely to go back to the way they were. Less trade less growth globally.

      Bad news for Aus in any case?

      Interested in views.

      • “Well before the question of whether it will get sorted – is the question “what does sorted look like?””

        Yeah good point there.

    • Indeed. No co-incidence HnH used to run a diplomatic mag and now runs an economics blog. Financial markets are the new Cold War Mutually Assured Destruction with the all state apparatus to match.

  4. I got my clients long $/CNH at 6.70/USD. Very pleased.

    Agree CNY path is down…

      • Even StevenMEMBER

        I disagree. I think you are attributing more influence to the RBA than they have. Sure, they control the overnight rate, but they don’t really control the middle and longer end of the yield curve. That’s just the market buddy!

        The interest rate is what brings savers and borrowers together.

        Too much savings, not enough people wanting to borrow (at the rate you would like) means rates are low. Simplistic and I’m sure others can point out some flaws, but it will do.

    • The widow Maker trade is beginning to look viable, AMP then WBC down the tubes

    • proofreadersMEMBER

      Peter Martin was to Captain Glenn, as Terry McCrann is apparently to Captain Phil?

  5. Trump is doing the work the RBA won’t do in terms of lowering the currency. We truly are the lucky country.

    • kiwikarynMEMBER

      Between Trump and Chinese capital controls, why do we need our own Governments?

    • yes… even if they come to some sort of agreement over trade things are going to be very different

  6. Wonder how many Foreign Chinese property investors thought they were diversified by investing into Aussie property… as they didn’t realise that the AUD is a CNY proxy?

    • Nothing stopping them selling out and moving their washed cash elsewhere – whoops, except buyers. Imagine what they’re thinking now. “Me confused, where all Aussie leveraged investors go? Why no one want buy my sh1t apartment or fibro shack in Chatswood?”