Any bounce in the Australian dollar like the one we have seen over the last few days might be a good time to sell the currency as the US introduces more tariffs against China which will dwarf the ones that are already in place.
The Trump administration has now decided to introduce a new round of tariffs against Chinese goods worth 200 billion dollars which is much larger than the tariffs already in place and Beijing has vowed to retaliate which now sets the trade war in full swing.
The news is devastating news for the Chinese economy and in turn for the Australian dollar as China is Australia’s largest trading partner and there are fears the tariffs will create significant price rises in a range of goods which will see less imports into Australia and the Aussie dollar is likely to feel the pain.
The currency took a big fall last time around when the first round of tariffs were introduced so when it becomes clear that Trump will stick to his guns about the latest tariffs and refuse to cancel them, the Australian dollar may see some serious losses.
Two of Australia’s biggest commodities, namely Iron ore and copper will also feel the effects as any disruption to global trade which the tariffs are likely to cause has an immense effect on commodity prices.
"Trade disputes between the US and world have caused immense uncertainty in recent months. We do agree with this apprehension that a 1 percentage point decline in global trade has historically reduced copper prices by around 4 percentage points," said analysts from Bank of America Merrill Lynch's global commodity research team.
"These numbers may sound small, but putting them into context, if global trade growth fell from April's 4.4 percent year-on-year to the 2015/16 average of 1.7 per cent, copper prices could correct by 10.8 per cent year-on-year to $5,100 a tonne." They added.