AUD/USD Forecast 2019: Collateral damage from the US-China trade war

• Slowing growth worldwide and particularly in China, to keep AUD/USD under pressure at the beginning of 2019.
• The Reserve Bank of Australia is proving that its cautious stance has better effects on the economy than rushing into tightening.

Aussie dumped on slowing growth fears

The Aussie was a casualty of the US-China trade war, heading into the end of 2018 1,000 pips below its yearly high when compared to the greenback. Being among the wealthiest nations in terms of wealth per capita, the Australian economy suffered from the ups and downs, the downs mostly, of the US administration’s decision to apply protectionism. A deteriorating domestic housing market, a result of tightening lending conditions and weakening demand, is also behind the AUD collapse. Despite the Reserve Bank of Australia has kept its cash rate at 1.5% since August 2016, mortgages had become more expensive, while dwelling prices soared on the back of cheap money pumped into house buying as an investment. Indeed, house prices have eased recently, but with wages stagnated, progress in the sector is too slow, enough to trigger concerns among policymakers.

In its latest monetary policy of the year, the RBA left the cash rate unchanged as said, while Governor Lowe said that the “economy is performing well,” yet adding that household consumption remains as a “continuing source of uncertainty,” amid the imbalance between weak income and debt levels still high. While agreeing that the next move in rates will likely be to the upside, the RBA sees no reason for a near-term adjustment in the monetary policy, with speculative interest pricing in an upcoming rate hike in 2020.

A light of hope comes from the employment sector, which maintained a solid pace of growth in November, as the economy added 37K new jobs, with the participation rate increasing to 65.7%. However, the largest contribution came from part-time positions.

Trade war to keep weighing AUD lower in the first quarter of 2019

China is Australia’s largest trading partner with over 30% of Australian exports going into the second world’s largest economy, with the Aussie directly correlated with Chinese growth. Trade tensions have fueled the economic slowdown of the Asian giant, which, in the third quarter of 2018 grew just by 6.5%, the weakest year-on-year quarterly GDP growth since the first quarter of 2009. In the three months to September, the Australian economy grew by 0.6%, the weakest pace of expansion in two years.

The US has been trying to reduce its trade deficit with China, so far unsuccessfully, as the country’s trade deficit with China during the first 10 months of this year matching the total deficit of 2017, despite tariffs. Both countries agreed on a 90-day truce that will end next February. The initial optimism about re-starting talks has already begun fading, despite some positive signs coming from both parts. Speculative interest at this point believes that a further escalation of the trade war is coming afterward, fueling the global economic downturn. That said, there’s little room for an AUD recovery in the next quarter. More likely, the currency will continue to suffer from fears of what’s to come and soft growth figures. However, Australia has the chance to emerge victorious even in the case of a deepening conflict between the US and China. Beijing could turn its eyes to its neighbor to replace agricultural products that come from the US if this last persists with its tariffs’ policy.

The original source of this article is FxStreet.