Australian dollar witnessed significant downward pressure for most of 2018 owing to US-China trade war tension. China is the major trading partner of Australian iron ore and coal. Undoubtedly, the Australian economy is largely dependent on China’s commodity demand. US and China slapping series of trade tariffs and the heightened South China sea war between the world’s giant superpowers, dampened the Aussie-China trade relations, thereby exerting a depreciating impact on AUD.
The slower Chinese economic growth and its sluggish industrial sector and commodity demand were coupled up with lower interest rate regime in Australia, resulting in lesser demand for the Australian dollar.
However, the Australian dollar rebounds in the new year from the lowest levels of 2018, owing to multiple favourable factors. As of 14 January 2019, the Australian Dollar is trading at USD 0.720, rallying up from previous low levels, driven by strengthened Chinese Yuan.
As per the official data released by ABS on Friday, Australia economy has experienced a 0.4% (seasonally adjusted terms) rise in Retail Sales for the month of November 2018 as compared to the market expectation of 0.3% monthly growth, 0.3% official October figures and 0.2% September figures. This seems to have provided a cushion to the AUD level as against the disappointing Trade Surplus data released by ABS last week. The Australian economy recorded a trade surplus of $1.925 billion in November 2018, much below the market expectation of $2.175 billion.
Besides, the lower US bond yields on both 10 years and 30 years treasury note, has resulted in lower demand of safe haven currency and relatively stronger demand of Aussie, accelerating the AUD-USD rate. The rally in the Australian currency is also supported by partial US shutdown since more than three weeks now. The longest government shutdown in the US history faces no possible relief with President Trump adamant to include $5.7 billion in the US budget for a Mexican border wall. The country is facing the possibility of a national emergency with failed negotiations with the Democrats.
The disappointing data released for Chinese exports and imports for the last month of 2018 may prove detrimental for the Australian dollar price, reflecting a slowdown in the Chinese economic growth. However, another factor providing upside to the Australian currency is the recent monetary initiative by Reserve Bank of China to decrease the bank’s reserve requirements by 1%. The first such RRR cut in the year, followed by four cuts in 2018, highlights China’s ongoing attempt to keep a check on the sluggish economic growth owing to mounting trade war pressure. Small banks were required to hold 12.5% of their deposits and reserves while large banks 14.5%. The 1% slash in RRR will occur in two equal increments of 0.5% each throughout the January month. Analysts are expecting further such cuts in the upcoming months.
The Australian dollar is anticipated to be stronger over the rest of 2019 with growing positivity around possible negotiations in the trade war, which seems to be an additional tailwind to support the Aussie flight. A deal to end the tariff war is expected before March to avert an automatic increase in the 10% tariff charged on $250 billion of goods exported to the U.S. each year.
With all the possible tailwinds and support factors for Aussie flight, analysts and economists are keeping a close eye on the unravelling of the global macro-economic factors.
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