Just before noon on Friday in New York we saw a symptom of emerging nation contagion hit the Australian dollar.
The currency traders, fresh from trashing currencies like the South African rand and Turkish lira, were testing the Australian dollar.
The raid was halted but while it lasted it was scary and a warning that if the US trade war with China gets out of hand we might be required to defend our currency with higher interest rates, irrespective of the domestic consequences.
Friday September 7 had opened calmly in New York with the Dow index nudging 26,000 and Dr Copper trying to regain ground after being hammered in the past week.
Then President Donald Trump announced on Air Force One that he was considering new tariffs which would mean that almost all US imports from China would carry a tariff. It was not a formal policy statement but both the Dow index and Dr Copper lost their forward momentum. No surprise there.
The surprise was that the South African rand and the Turkish lira—the usual targets during Trump-driven scares— never missed a beat and actually rose on the day.
Having made a fortune, the traders have moved on and Turkey, at least, is talking about higher interest rates despite the community devastation they will cause.
Australia fascinates the traders because in recent years they watched our banks step up their overseas borrowing to fuel the housing boom helped by the fact that they rigged the rate where US debt was swapped to Australian dollar debt. It made US dollar borrowing low cost and enabled the banks to squeeze local term depositors.
But the big banks have all been fined for the rigging so the cost of swapping US debt to Australian dollar debt has exploded. And the banks have passed the higher cost into homeowners. The traders can see that Australians are running down savings to maintain consumption and we are in the front line if the US-China trade war escalates.
On Friday our dollar had fallen below US72 cents prior to the Air Force One announcement but in the hour after the announcement it plummeted below US71 cents, before steadying just above US71 cents.
If the dollar falls below US70 cents the traders and their mates in the big US investment houses will dutifully issue forecasts of it falling below US60 cents and it’s game on.
There is a real risk that the China-US trade war is going to be a very long battle.
The US wants to restore its manufacturing base and preserve its technology and believes that the new technologies will enable it to match China on costs. But the interim stage will be nasty as the cost of imported products, including Apple devices, rises mitigated by the higher US dollar.
If China was going to give in quickly I suspect it would have acted by now.
Over the weekend I came across the commentary of Beijing-based Chinese commentator Michael Schuman, who says that anyone who expects China to concede defeat in its trade war with the US should read about Biobase Group.
The Chinese manufacturer of laboratory equipment once struggled to win orders even at home in an industry dominated by foreign products. But the company’s prospects have brightened as the trade war prompts customers to turn to domestic alternatives.
Schuman’s story is from the state-run China Daily, so he warns take it with a “trailer-truck-sized grain of salt”. But the Biobase story makes an important point: The Chinese government is happy when its citizens buy locally made instead of American products.
China isn’t desperate to maintain its interdependent relationship with the US. Rather, it’s a national objective to become more economically independent.
Schuman says the White House believes China is still so reliant on the US for growth and jobs that its leadership can be pounded into submission with tariffs— it’s only a question of when President Xi Jinping comes begging for mercy.
But China isn’t desperate to maintain its interdependent relationship with the US. Rather, it’s a national objective to become more economically independent.
In real life, Trump’s tariffs are unlikely to inflict enough pain on China to compel it to make concessions. Beijing’s entire economic strategy is designed to replace critical foreign technology and products with homegrown alternatives it can control.
“Simply, the Communist Party prefers Chinese to buy Xiaomi phones and Geely cars, not iPhones and Buicks,” Schuman says.
The China Daily declares that the trade war, therefore, comes as a “blessing in disguise”.
My conclusion is that we had better understand that this trade war is going to get deeper because both sides independent product making as in their interests.
That makes our currency vulnerable, particularly as we have borrowed heavily overseas.
The borrowing is longer term but it is stimulating the interest of the currency traders, as we saw on Friday.