Trade War Escalates and Complicates the Outlook for the RBA

6th of August, 2019

China fired back yesterday in escalating trade tensions with the United States, allowing their currency slide through a key level, sending markets into a tailspin. The move has broad implications for the domestic economy and upcoming RBA forecasts.

With President Trump tweeting the need for higher tariffs in recent days, it was a simply a matter of time before the Chinese responded. For an economy with tight controls over the level of their currency they chose to raise the fixing level of the Chinese Yuan to 6.9225 per USD. The choice of a level above the 6.900 long term ceiling quickly saw the currency run and break the 7.000 barrier, settling overnight at 7.050.

Despite the measures by the Chinese being directed squarely at the United States, there are broad implications for the Australian economy. Amongst a broad decline in asset prices overnight was a steep decline in the price of iron ore, down 5.8%.

Market expectation are now growing that these trade tensions will result in a slowdown of growth in China, the US and the globe more generally. Should growth in Asia slow, the need for Australian minerals would similarly decline. The implications for growth locally and government revenues should volumes and the price of iron ore decline are quite severe.

The RBA are scheduled to meet today to review monetary policy settings and it will be interesting to read their views on the implications from the rising trade tensions. The market is expecting they will leave the cash rate on hold this month but continue their messaging of a ready to act footing.

Given the heightened uncertainty over the outlook and in light of market wobbles the past couple of days, market pricing now has the cash rate going below 0.5% within 12 months. Market pricing is an important input in to the RBA’s updated forecasts which the RBA will allude to today before releasing them on Friday.

Matthew Dunshea

Client Relationship Manager