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Australian Dollar May Not Have Much to Gain From US-China Deal

Australian Dollar May Not Have Much to Gain From US-China Deal

2020-01-15 02:00:00
David Cottle, Analyst
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Australian Dollar, US-China Trade Deal Talking Points:

  • AUD/USD has risen sharply since October in anticipation of a trade deal
  • The Australian Dollar is ‘growth correlated’ so this makes some sense
  • However, the China/Australia trade relationship remains so strong that a US-China deal may not boost it much

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The Australian Dollar may well gain ground, along with other growth-correlated assets, on signs that the trade relationship between China and the United States is warming. However, Aussie watchers might do well to read the details of any trade deal very carefully.

Of course, as the currency of a country with obvious trade and political links with both Washington and Beijing, the Australian Dollar market has as much interest as that of any third currency in trade peace between the world’s two major players.

But trade war between them has not been all bad news for the Australian economy, even if it clearly weighed on AUDUSD in the first ten months of 2019. Tariff war saw China substitute many former US imports, and some of that substitution came Australia’s way.

Australian Dolalr Vs US Dollar, Daily Chart

For example, Australia became by far the largest single national supplier of Liquified Natural Gas to China after Beijing raised its tariff on US product to 25%, from 10% back in June. 2019 will be a banner year for Australian LNG exports to China, after two years of declines. Only Japan now buys more gas from Australia than China.

If trade war ends between China and the US, American LNG producers may well be back in this market with vigor.

China-Australia Trade Has Held Up Very Well

Moreover, despite an increasingly tetchy political relationship, trade links between Australia and China remain as strong as ever and have not been obviously hard hit by trade conflict elsewhere.

Australia’s value share of overall exports to China reached 38% in October last year, more than any other country, according to a study by the Australian National University. Staples such as iron ore and coal clearly had a very strong year. Widely reported industry figures showed that Australia provided no less than 74% of all Chinese imported iron ore in June 2019, a figure which has doubled over ten years.

In short physical trade between China and Australia already revs at extremely high speed. For all the goodwill a US-China deal may generate, it may not amount to a vast increase in capital flows between China and Australia which have remained high and may even have been enhanced, by last year’s trade war.

Australian Dollar traders will of course be free to cheer the deal. But they might also be very well advised to keep a close eye on the trade figures too.

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--- Written by David Cottle, DailyFX Research

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