RBA Governor Says Australia’s Economy Is Not So Exposed To The Risks Of The China-U.S. Trade War

RBA Governor Says Australia’s Economy Is Not So Exposed To The Risks Of The China-U.S. Trade War - Australia, Sydney, Opera House
Bill Cascade   NEW 28/08/2019 00:00:00 Finance

The ongoing trade war between China and the U.S. has been a significant source of concern considering that it is a major reason behind the currently decelerating global economic conditions. A recent statement by Guy Debelle, the current Governor of the Reserve Bank of Australia (RBA) suggests that Australia is cushioned from the effects of the prolonged trade war.

Debelle recently pointed out that the country has a declining foreign account deficit and it has been on the decline for the last ten years. He revealed that the net foreign liabilities as a part of Australia’s gross domestic product shrunk to the lowest point since the early 2,000s. The country holds most of its debt in Australian dollars, and this means that it is not as exposed to the impact of the ongoing China-U.S. trade war. 

Australia also holds most of its large equities investments in foreign currencies. This approach has been critical towards shielding the country from the effects of the global economic slowdown. This means that Australia’s net foreign liabilities fall when the Australian dollar declines.

The Australian dollar has so far dropped by 4% since the start of 2019 and even traded at levels that were last seen a decade ago.

AUD/USD Forex Chart

Source

The AUD/USD currency pair kicked off this week on bullish momentum that saw its price surge from a low of 0.6706 on Monday morning to a 2-day high of 0.6784. The currency pair traded at 0.6759 at the time of this press after losing some of Monday’s gains on Tuesday morning.

The China-U.S. trade war is still a threat 

Although the RBA says Australia is cushioned from the negative effects of the U.S.-China trade war, thanks to its currency and foreign liabilities position, it acknowledged that there is still significant risk. Debelle stated that the country’s balance of payments is exposed to risks due to the threats that the world trade system is facing.

The world expected the China-U.S. trade war to come to an end, but it continued to escalate this month on the heels of failed trade talks.

Consequently, there was a massive stock selloff in the global market. Aussie authorities are concerned that the shifting dynamics may lead to the implementation of new trading rules in the global market. This could end up disrupting Australia's trade surplus, which has been on the uptrend.

Australia’s account deficit has lately been in its lowest range for the past four decades. The country’s trade surplus is also closing in on levels that were last seen in the '50s.

The current global trading system rules have been unchanged for years. It is not a perfect system, but it has provided significant benefits as far as global growth and welfare are concerned.

If China and the U.S. fail to reach a favorable economic middle ground that will end their trade dispute, the situation will likely continue to hurt the global economy. It is therefore in everyone’s best interest, including Australia's, that the two sides reach an agreement that will help normalization of the global trade situation.

 

 

 

 

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