NAB with the note.
We must acknowledge that US economic exceptionalism has recently become even starker and is ostensibly supportive of further US dollar gains into year-end.
We would not be surprised to see the Aussie trade with a five in front of it at some point next year.
The Australian dollar currently has nowhere to hide as US tariff threats move closer to reality.
…The best hope for the Aussie being spared a visit below US60¢ … is if China’s response to US tariffs is one of deciding that, strategically, its best interests will be served by a policy of relative renminbi stability.
So, the best hope for the AUD is for China to bring a potato peeler to a nuclear war.
Trump is unleashing tariff warnings all over the place.
“The idea that the BRICS Countries are trying to move away from the dollar while we stand by and watch is OVER,” Trump said in a post to his Truth Social network on Saturday.
“We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy,” he added.
Goldman sums that up.
…we think FX markets will need to embed a more lasting, and broader, tariff premium in both spot and vol markets (in line with the initial market reaction overnight on Tuesday) as this tariff announcement risk will never be off the table in a Trump presidency—deal or no deal.
After all, while these specific tariffs seem unlikely, it is important to keep in mind that the opening salvo of Trade War Two comprised across the board tariffs on the three largest US trading partners that account for close to half of US goods imports.
Though broad tariffs like this were proposed several times in the first term, a 10pp increase in China tariffs would roughly equal the entirety of Trade War One, and including a 25pp tariff on Mexico and Canada would come close to equaling the potential size of a baseline 10% tariff rate on all trade (Exhibit 1).
We take it as a sign that President Trump will have no compunction about large tariff increases again, and note our economists’ baseline expectation incorporates tariff increases that would be roughly double to last time, implemented rather quickly next year, and with a perpetual risk of more (and less!).
We expect the policy mix of tariff hikes and tax cuts will lend significant support to the Dollar over the coming year.
The odds clearly favour China responding via a lower CNY.
Over the past two years, China has demonstrated impressive control over its currency amid the largest property crash in history.
It has many more tricks to let it fall without collapsing.
The AUD outlook is bleak.
