Westpac: Australian dollar smashed if trade war worsens

Via Bloomie:

Bank of America Corp. sees the Japanese yen strengthening as investors flee risky assets, and has recommended an associated euro-yen trade. Goldman Sachs Group Inc. warns that currencies from the euro to South Africa’s rand and Chile’s peso could be in the firing line. And Westpac Banking Corp. sees bonds as a safe bet.

“It’s probably one of the most underappreciated things in this market — this FX question” about the impact of trade tensions, said Thomas Costerg, an economist at Pictet Wealth Management in Geneva.

…“Taiwan and South Korea have the most to lose if things intensify,” said Richard Franulovich, Westpac’s head of FX strategy in New York. The won and Chinese yuan, along with the Taiwan, Australian and Canadian dollars, “are all exposed,” and the euro “would fall pretty dramatically,” he said. For downside protection, he advised shorting these currencies or owning the bonds in their markets.

This is right. European exports will get hammered as the Chinese supply chain emigrates and it struggles to revive domestic demand. China will also have to cut interest rates and sink the yuan. In turn making the trade war worse. It would also intensify its efforts to prevent CNY from falling too far, meaning more pain for those on the end of Chinese capital outflows like tourism and students.

At the same time, higher tariffs lift US inflation and the USD.

This is a real nightmare for emerging markets (EM), similar to the meltdown of 2015, when EM’s were pincered as competitiveness was crushed by a falling CNY, and capital outflows repatriated to the rising USD.

Commodity prices are road kill in this scenario. As are commodity currencies like the Australian dollar.

It would run until the Federal Reserve was forced to cut aggressively into an end-of-cycle shock.


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.

Comments

  1. The other thing i’d like to add.
    A very big factor in play locally is petrol prices.
    I just filled up a 60 litre tank $96
    If oil holds firm and AUD comes off to mid 60s, petrol will be around $2
    Not sure if that will even feed through to inflation???
    You’d have to say if we have $2 litre fuel and all these loans turning p and i over next 18 months, then interest rates will have to fall much further than predicted that will push AUD lower again and petrol prices up.
    Don’t be surprised to see $2.40 litre for premium unleaded.
    That will be a big factor slowing economy on it’s own

  2. Old post made on MB some months ago, but relevant here. The real Australia China trade exposure.

    Just say (hypothetically) Trump pulls off his US / China ‘trade rebalancing’ deal.

    And the overall goal by both countries is not to reduce the Chinese exports to the US, but to massively increase US exports to China.

    By say $250-300 billion a year over time.
    Just say again hypothetically- a 10 year US to China $2 Trillion export deal.

    Who are the winners & losers?

    What exactly does China import today?
    Who is impacted by China switching to the US as a supplier.

    First, Trump holds all the cards on fixing trade and the corrupt Chinese trade practices and manipulation.

    128 million Chinese live directly or indirectly off china exports to the US.

    China has 3 major insurgencies underway, Tibet, Mongolia, Urghars, plus HK & others in rebellion.

    The China One Belt Road has failed, lost in corruption and hated by surrounding countries frightened by china’s empirical ambitions.

    The Chinese communists have lost face as Trump backed Taiwan to block any ‘One China’ invasion, and China lost their South China Sea claim – US navy ships steam thru.
    The Chinese Pig industry just collapsed.
    African Swine Fever, 100% mortality, the Ebola of pigs 🐖🚫 has now spread all over China & now into all of Asia. In China, up to 148 million pigs dead (19% of their 780 million pigs) from African Swine Fever – read this Time article.
    http://time.com/5580126/china-swine-fever-pork-industry-spreading/

    China eats 55 million tons of pork.
    It’s the poor people’s staple protein.
    There is literally not enough fish, beef, chicken in the world to make up the gap.

    The US economy is surging and forecast to grow further / even if China dumped its US holdings & bonds, they would be quickly snapped up by the rest of the world.

    China has a collapsing stock market, faltering economy, massively in debt, rebellions, and faces a hundred million unemployed Chinese in their cities, and No PORK BUNS..

    => Rivers of blood & civil war unless the communist party regime folds.

    🇺🇸 Trump holds all the cards👌🏻

    Let’s say 10 year US $$2.1 TRILLION Trade win.

    🔹The Winners & Losers in China import volume & priorities.

    #1. Plant. US plant : replacing North Asian & Europe plant, some small Australian.

    #2 Energy. US gas / replacing Qatar, Australia & south east Asian gas. US gas is 19% cheaper (with current tariffs) than Qatari gas. The US is poised to be the world’s largest gas exporter in 3 years, overtaking Qatar & Australia.

    #3 Coal. US thermal & metallurgical coal / replacing Indonesia, Vietnamese, Australia & Brazil coal.

    #4 Ores. US replacing Australia & Brazil & other suppliers Ore.

    #5 Chemicals / plastics etc. US replacing a variety of Asian, European suppliers.

    #6 Food – that would increase in imports in the pending China meat / protein crisis. US has everything in surplus, meat, grain, along with South Asia, Australia & NZ also.

    #7 Vehicles, heavy vehicles & consumer – replacing European & North Asian vehicles.

    #8 Services: replacing Europe, north Asian, Australian etc services.

    #9 IP, patents, copyright royalties in both IT & Pharma, China stops theiving & pays royalties. Mostly to the US.

    #10 Milk Powder, supplements, vitamins, US taking share from NZ, Australia, European products.

    -/-

    It doesn’t bode well for Australia.

    🔻No trade deal, China continues to falter, low growth, our exports reduced.

    🔹Trump China Trade deal – Australia, NZ, Indonesia & many others face major loss in trade exports.

  3. Think you are right, the crisis will come from EM this time.
    EM are very heavily in debt dominated in USD.
    Even China, I believe its SOE? that have borrowed in dollars, well it’s one of China’s ponzi sectors.

      • Arrow, I had a drink with Harry Dent a few weeks ago.
        I actually ran into him at the back of the hotel and had quite a long chat and bought him an aussie chardonay.
        He hasn’t been right on a lot of things but he said China property is the most over valued property market in the world and there
        is no way there won’t be a crash, he said it’s one of the biggest bubbles in history.
        I can’t read that article from FT but I am sure I know what it says.
        Well who knows on crash but there has to be a serious downturn, I think you are right.

      • Harry Dent, that would have been a great convo.

        Try this link for the FT story.

        https://www.google.com.au/amp/s/amp.ft.com/content/03d1dfc2-6286-11e9-b285-3acd5d43599e

        “China’s Evergrande was supposed to scale back its towering debt pile this year, leading the country’s property sector in a much needed deleveraging. But a surge in US dollar borrowing has investors worried the burden will actually grow.

        Local developers have doubled their US dollar bond issuance to $32bn since the start of the year, according to data from Dealogic, as they seek to refinance higher-cost and shorter-term debt.

        Some investors have welcomed the wave of issuance as a sign the companies are focused on paying down more costly bonds onshore, where repayment pressure has mounted with Rmb267bn ($39.7bn) still to mature this year. Yet as China’s property market cools, there is a growing risk the sector will end up with unmanageable debt.

        Evergrande is China’s most highly indebted property developer, owing a total of more than $100bn, while the industry faces a wall of more than $300bn in maturing debts in the next two-and-a-half years.”

    • Gav
      I think the only play is long USD on a good sell off.
      I think the 2 stand out basket cases are Europe and Australia