The Aussie dollar was pushed to its lowest interbank levels in 10 years against the US dollar as the Australian stock market shed more than $36 billion in value as concern that the US-China trade war could escalate to a full blown currency war that will hit the global economy.

Expectation of another interest rate cut by the Reserve Bank of Australia increased as investors believe China will resist the US and Trump’s will to dominate negotiations, although the Reserve Bank of Australia kept rates at 1% in the earlier hours of this morning.

China block purchase of US agricultural goods

China block purchase of US agricultural goods

There was an instant impact on the Aussie dollar as the Chinese announced that they would put a block on the purchase of US farm goods. The Aussie dollar is now close to levels against the US dollar, which haven’t been seen since 2009.

Chief Economist at St George Bank, Besa Deda said “The biggest single global threat to the economy is the ongoing trade war and the risks that it escalates further.” AMP Capital Chief Economist, Shane Oliver, said “this would see a further weakening in global growth, lending to reduced export earnings for Australia which in turn boost unemployment, risking another leg down in-house prices.”

Rate cut priced in despite RBA hold at August meeting

Business and consumer confidence could be seen to be weakening and other areas of the economy including employment and new orders have all moved lower, pointing towards a potential slowdown in the economy. Quarter two Consumer Price Inflation numbers, released on Wednesday, were marginally above estimates (1.6% versus 1.5%) so headline inflation is way short of the RBA’s target of 2.5%, which makes the chance of another cut later this year high (markets have priced in an 85% probability).

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