Macro

It’s fair to say that President Trump’s threat to impose 10% tariffs on the $300bn of US goods imports from China that are not currently taxed was not well received in Beijing. Given that the tariffs would not apply until 1 September, there was an initial glimmer of hope that China might not retaliate quickly. 


Instead, as well as verbal defiance from Chinese officials, Monday saw the break of the closely watched USD/CNY 7.00 level, producing the yuan’s weakest levels since May 2008. Unusually, China’s central bank chose to explain this move publicly, attributing it to “the impact of unilateralism and trade protectionism, as well as the expectation of additional tariffs against China.”


AUD/USD fell about 0.5c on the yuan’s slide, as regional equities and currencies tumbled. Concern over deteriorating US-China trade relations was amplified less than 24 hours later, as a series of tweets by President Trump alleging FX manipulation by China culminated in the US Treasury formally designating China as a currency manipulator.


This was the first such label by the US since 1994 and came despite China not even coming close to meeting Treasury’s own criteria in its May FX report. Still, at this point US-China trade talks set for September are still on and the Aussie held its ground on the news of the manipulator label.


What hurt AUD more than trade tensions was Wednesday’s shock 50 basis point rate cut by the RBNZ, from 1.5% to 1.0%. This knocked the Aussie to the 0.66 handle for the first time since 2009. The accompanying slide in Australian yields was arguably excessive just a day after the RBA’s steady hand at its monthly meeting.


The RBA still expects Australia’s economic growth to pick up from 2.5% this year to 2.75% in 2020. And for all the concern over US-China trade tensions over the past year, this week Australia reported a record-smashing trade surplus of A$8bn in June. While spot iron ore prices have slipped below US$100 per tonne in recent days, this week China released July trade data including a 19% rise in its imports of Australian goods over the year.


Yet any relief for the Aussie could be short-lived, as an important domestic data calendar looms in the week ahead. Along with July business confidence and August consumer sentiment surveys, we will see Australia’s Q2 wages and July labour force data. Westpac looks for annual wages growth to soften slightly to 2.2%, a long way short of where the RBA and government would like it to be.


In the labour force survey, we look for a modest 5,000 increase in jobs, which should see the unemployment rate tick up to 5.3%. Such outcomes on wages and unemployment would reinforce market expectations for another RBA rate cut soon, with pricing for a September cut rising to a 60% chance after the RBNZ shock.


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