Aussie dollar's gyrations show how insignificant we are
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Aussie dollar's gyrations show how insignificant we are

The Australian dollar has been on a wild ride over the past week. It was smashed by the botched attempt at a conservative coup within the Liberal Party that still toppled a prime minister but has been rescued by Donald Trump’s trade "deal" with Mexico overnight.

The Peter Dutton-led challenge to Malcolm Turnbull saw two US cents wiped off the value of the Australian dollar in two days. It fell from US74 cents to US72 cents, its lowest level for about two and half years before recovering some ground as Scott Morrison emerged as the surprise victor.

US President Donald Trump meeting Mexico's trade negotiators.

US President Donald Trump meeting Mexico's trade negotiators.

Photo: Al Drago/Bloomberg

It climbed back sharply overnight as the announcement of the US trade deal with Mexico was unveiled, reaching US73 cents.

The reaction to the agreement – US stockmarkets hit record levels, the US dollar weakened and the peso bounced – was one of relief. The markets interpreted it as a sign that deals could be done and trade tensions eased. That may have been a premature conclusion.

US Federal Reserve board chairman Jerome Powell gave a speech at the annual conference of central bankers at Jackson Hole in Wyoming at the weekend that may also have contributed to the US dollar’s depreciation.

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He expressed confidence in the US economic outlook, said he does not see inflation trending much higher and expected the current Fed strategy of only gradually raising interest rates to continue.

It has been expectations that US rates might rise more sharply in an environment where unemployment is at record lows, the Trump tax cuts and big spending increases are fuelling strong growth and trade tensions attracting "safe haven’’ capital flows that has underpinned a surge in the value of the dollar this year.

The impact of the Mexico deal and the comments of a US central bank chairman underscores how little the value of the Australian dollar is influenced by local events, however significant they might be within the domestic context.

After the brief response to the unseating of the prime minister, it was US-centric international developments that, once again, established their primacy over US dollar-denominated trading in the local currency.

The Aussie dollar was little moved by the ascendancy of Scott Morrison as prime minister.

The Aussie dollar was little moved by the ascendancy of Scott Morrison as prime minister.

Photo: Alex Ellinghausen

Whether the impacts we saw on Monday night are lasting is another issue.

The trade deal isn’t actually a done deal. While the US and Mexico have (under the threat of the US blowing up the existing North American Free Trade Agreement) negotiated the terms of a deal, the NAFTA agreement also includes Canada and it may not be legal to strike a binding deal with Mexico without including the Canadians.

Any deal would also need Congressional approval, which might be withheld if Canada is excluded.

President Trump has threatened Canada with more tariffs, including tariffs on cars (made by General Motors, Ford and Chrysler) if it doesn’t make concessions but so far the Canadians haven’t blinked. The nature of the deal with Mexico might, however, make them more willing to contemplate changes to the NAFTA arrangements.

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Apart from some concessions on the US content of cars made in Mexico for the US market, on the percentage of cars that have to be built in factories with minimum pay rates of $US16 an hour (both of which will drive up the cost of the cars for US consumers) and some sensible updating of the NAFTA treatment of intellectual property, there isn’t much of substance in the changes to the relationship.

Where Trump wanted to have the ability to automatically terminate any new NAFTA agreement after five years, the agreement with Mexico would see the deal reviewed every six years – with termination possible a decade after the review.

Still, it allowed Trump to claim a victory and move on, mission accomplished, to Canada, China and his other trade targets.

It puts our markets and what drives them into perspective. The interpretation of anything the US Fed says about US interest rates, or the knee-jerk response to the headlines of a Trumpian statement on trade, has more impact on the value of third country currencies than almost anything they could do themselves.

For our economy, the significance of the US-Aussie dollar cross-rate is multi-layered. It impacts capital flows because the market in the Australian dollar is a deeply liquid and traded one which provides a developed-world exposure to China, most of our key commodities are priced in US dollars and our resource companies borrow in US dollars.

In an environment where traders believe global risk levels are low, the Australian dollar strengthens. When it's "risk on,’’ it weakens. The US is at the centre of perceptions of the risk environment and its currency and bond market the safe havens to which capital flows when risks are thought to be rising.

It’s a sobering thought that the fall of a prime minister is less consequential to the value of the Australian dollar than a central banker saying that his policy hasn’t changed, or Donald Trump claiming that an agreement yet to be ratified by either Canada or Congress is “maybe the largest trade deal ever made”. (Which, of course, it isn’t.)

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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