Australia is heavily dependent on China purchasing its goods and services and due to this the Australian dollar is susceptible to losses if there is any fall in Chinese growth.
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A trade war between the world’s two largest economies does not bode well for the global economy and Australia could be one of the bigger losers.
There is currently a truce for 90 days on current tariffs, which had been put in place as China has agreed to come to the negotiating table in regards to changing their global economic strategy. I do not think China will be willing to make these changes, as this would have a significant impact on Chinese growth. It may be the case that the Chinese will elongate the trade war, making as little concessions as possible in the hope of riding out the trade war until Trump is no longer in office.
Trump has issued the threat of an increase in Chinese goods to 25% if he is not satisfied with the progress in negotiations. If this is implemented, expect substantial Australian dollar weakness.
The Aussie has lost ground against the majority of major currencies, but sterling continues to be anchored due the current Brexit situation and it does not look like we will see any significant gains until there is some clarity.
There is little data of consequence for the remainder of the week and indeed next week from Australia. It could be prudent to keep an eye Chinese economic data however considering the influence China has on the Australian economy. China’s trade balance data is due out on Monday, but considering the truce we may not see too much movement.
GDP is the one to watch as it shows a clear indication of growth in China. Growth is slowing with GDP coming down to 6.4 in 2018 from 2017’s 6.6. The next GDP release will be 21st January for the 4th Quarter where there is expected to be a decline of 0.1%, personally I think this could be worse which could result in AUD weakness.
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