Australian dollar to rise as China wins trade war

See the latest Australian dollar analysis here:

Macro Morning

DXY pulled back last night as EUR and CNY fell:

The Australian dollar was mixed against DMs:

But weak against EMs:

Gold held on:

Oil eased:

Metals climbed:

Big miners too:

And EM stocks:

Junk was OK:

Treasuries sold:

Bunds too:

But Aussie bonds were bought:

Stocks flamed out:

Westpac has the wrap:

Event Wrap

The US National Federation of Independent Business May small business survey jumped to 105 from 103.5 – a seven-month high – defying expectations for a pullback amid volatile financial markets and elevated trade tensions. Expectations for the economy, CAPEX plans and hiring intentions all firmed. US producer prices rose 0.1% in May, the annual pace easing to a non-threatening 1.8% – the slowest pace since early 2017.

UK April/May employment report provided surprise lifts in both employment (+32k, est. +4k) and average wages (+3.4% 3m/y, est. +3.2%). Although headline unemployment remained at 3.8%, the overall report was seen as strong despite the uncertainty of Brexit.

BoE MPC members Saunders and Broadbent added to comments from fellow MPC member Haldane yesterday in suggesting that rates would be higher under a smooth Brexit, that markets are under-pricing the potential of rate moves and that a hike could even occur prior to any Brexit resolution. However, Broadbent added, in response to Parliamentary Select Committee questioning, that he could not give any clarity over how policy might alter if there is a no-deal Brexit due to the potential volatility it might generate.

Event Outlook

NZMigration for April is released, as is electronic retail sales for May which is expected to have gained 0.5%.

AustraliaWestpac-MI Consumer Sentiment was last at 101.3. This update will provide consumers’ reaction to the Federal election result and June RBA rate cut. RBA Assistant Governor (Financial Markets) Kent gives remarks at the Australian Renminbi Forum, Melbourne 9:25 am. RBA Assistant Governor (Economic) Ellis gives a speech titled “Watching the Invisibles”, Melbourne 7:00 pm.

China: May CPI and PPI are released.

Euro AreaECB President Draghi speaks at the “Resilience to Global Headwinds” conference in Frankfurt.

US: May CPI is expected to show annual inflation edging down to 1.9% from 2.0% while core inflation holds at 2.1%.

Not much by way of data but there is an interesting short term dynamic emerging in which China is suddenly winning the trade war via better growth than the US. The former has primed the fiscal pump with direct stimulus as we know:

Local governments have been especially active:

But the real key is ongoing strength in empty apartments:

And a falling CNY:

Leading a growth rebound just as US growth comes under intensifying pressure:

The easiest way to represent this for the AUD is to compare it with iron ore prices:

As you can see, the AUD is unusually out of step with bulk commodity prices today. This is largely thanks to the negative yield spread to Australia. As the Fed starts cutting on a slowing US economy, reducing the spread – this gap may close a little in the short term.

That said, I do not expect it to get far because the RBA is also going to cut more than is priced in markets, as well as other central banks which will trail the Fed, including China’s.

As well, medium and longer term this is no victory for China. It is a short term political win at the expense of the longer term as it leads to ever more misallocated credit, ever less productivity growth, and a giant debt overhand that will only serve to bog China down into the middle income trap.

David Llewellyn-Smith

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.

Latest posts by David Llewellyn-Smith (see all)


  1. Phillip McCracken

    I see serious miscalculation in Trumps trade war. Hear me out.

    Huawei and HiSillicon Kirin processor chips with AI now exceeding Snapdragon. Ban on ZTE cost too many jobs in the US so ban was lifted – too late – supply chain shifted to MediaTek – jobs lost.

    MediaTek and HiSillicon now dominating the supply and US losing jobs in a market it considered a monopoly only a few years ago.

    Other US dominated tech includes networking on mobile, micro-storage, glass etc – ALL have now shifted to Taiwan and China manufacturing and supply chains in a matter of months.

    Trade was entirely reliant on Asia not being able to supply these products and the US monopoly holding firm – entirely broken.

    Effect – not just jobs lost through Asian competitors being banned – but now demand is entirely shifting to a new class of suppliers.

    Next up is the shift to an entirely new operating system Hongmeng. Android is currently controlling almost 80% of the entire global mobile / tablet market share. Apple is collapsing month on month.

    If Hongmeng is as good as rumours (operates and works as BOTH Android mobile and Windows) then we could very well see a global mobile and potentially desktop environment dominated by a Chinese operating system.

    Staggering turn of events – absolutely mind blowing in only 18 months of trade war.

    Most of these things were well and truly in the pipeline and development (Hongmeng was secret but processors was known – nano-storage from Huawei was not known) and Trump should have factored this in.

    It raises some serious questions about the decision to enter the trade war.

    With China on the very edge of dominating the global smartphone market (already does with Huawei sales) the prospect of a rare earths ban to the United States the consequences could be a catastrophic failure for the US and overwhelming victory for China.

    From 2013 onwards CHinese electric vehicle sales have almost tripled each year – not exponential – triple exponential with the largest growth area in electric buses means that Chinese oil demand is expected to start falling 2020-2021….mind blowing.

    The impact from the Chinese uptake of electric vehicles has been a flow on effect of cheap electric into all other parts of the world where the same thing is now happening.

    Result : US oil hegemony pulls back, petro-dollar is diminished.

    • Nice user name,
      China’s greatest strength was displayed when they conquered the large islands in the South China Sea, they have clearly demonstrated they are no match for any foreign power.

    • This is a war not a battle. War hurts and US has experience with that and is prepared to ‘protect’ at a price and that price has not been met yet. The strategy is a-symmetrical for the US. Chinese facarde-ism is for the locals the experts know where to poke to bring about the changes they want.

  2. DominicMEMBER

    The strategy for the Chinese is simple: as the US slides toward inevitable recession the Chinese continue to announce solid GDP growth, thus declaring victory in the trade war and embarrassing Trumpus in the process!

    The fact that most data published via the official CCP channels is fake is irrelevant — it’ll still give the US voter pause for thought and put the Trumper in a tight spot.

  3. Plot iron ore against broader base metal prices. The market that’s out of wack isn’t the A$, it’s iron ore.

  4. If all the debt that China is raking up is owned to their own banks then it is not really a problem. China has the type of government control system that can vapourise the debt through a write off overnight. They know that there is so much debt in the world that it is inevitable that a global jubilee will need to be called (or mass helicopter money to the people). Hence why China is building up their gold stocks so that they will still be able to trade when it happens.
    Chinas bigger tragedy is that a lot of the debt they accumulated has been used to build appalingly shoddy housing, although they also have got a lot of rail and other quality infrastructure. All Australia’s got from its monumental debt bubble is some of the worlds most overpriced housing and an explosion in the number of massage parlors (brothels).

  5. Eugene Brislan

    The AUD has just fallen to its lowest valuation ever against Gold. What credible economic commentator would say that it is set to rise in the current environment of lower rates and renewed/never ceased QE?
    AUD purchasing power is getting smashed – that is the story.