Aussie China sanctions risk 65 and even 58 cents

The tumult of the Ukraine war stretches far and wide, and Australia has most certainly pushed itself onto the front lines. The provision of missile launchers as well as sanctions on hundreds of individuals place as Prime Minister Morrison has stated, Australia lockstep in actions taken by the USA.

The talk of the US and therefore possibly Australia actually applying sanctions against China has raised many an eyebrow across the investment community of Asia. We first forecast a decline to 70 cents when the Australian dollar was still at 77. More recently I have highlighted the risk to 65 cents, and perhaps even 58 cents where the currency has been before, in the years ahead. Our declining relationship with China has been accelerated in recent years and there seems little on the horizon to suggest and quick resuscitation. Australia has clearly chosen a path of aligning itself ever more closely with the USA. This is important as it highlights that the imposition of sanctions against our largest trading partner, is indeed a very real probability should the USA take and suggest such action.

China has already declared and said previously that it will increasingly be looking to shop elsewhere. Away from Australia where it can. Some specific Australian industries have already paid a high personal price for the deteriorating relationship. Should Australia deem it appropriate to follow suit with any new US sanctions against China it would seem the nation is prepared to do so. The economic impact would however be almost immediate and move further to the negative over the years ahead. It was China’s continued demand for our mineral resources and agriculture during the Global financial Crisis that contributed significantly to Australia’s economic well-being during that period. Over the past 15-20 years the historic shift of China from agrarian toward capitalism has been a tremendous contributor to Australia’s economic cycles. Trade patterns around the world are increasingly diverse and Australia will find additional markets for its exports. Nevertheless, it is highly unlikely that lost trade with China will be made up for. The 5 to 10 year horizon for Australia’s trade with China has already suffered a significant downgrade. The application of sanctions against our trading partner would not be seen favourably and the movement away from Australian products by China could be expected to accelerate sharply.

As a trading nation of just 25 million in this highly dynamic world, one with significantly heightened risks, the path forward is challenging across all aspects from diplomacy to alliances to trade. Whether Australia can find a way through this seeming minefield remains to be seen. Financial market investors and traders alike are becoming more aware of the geo-political shifts taking place in the world. Australia’s intensifying relationship with the USA while being somewhat critical of China’s actions, is likely to see a re-set lower of the Australian dollar.

In the short term the dollar down under has benefited from perceived safe-haven status. Far from the conflict of Europe while enjoying some benefit through higher energy and commodity prices. This short term strength, which has really only seen the Australian dollar move toward the top of its recent entrenched range, could begin to melt away rather quickly should US talk of sanctions against China become more concrete.

Having previously highlighted risk to 65 cents and even lower on the basis of a more aggressive Federal Reserve than RBA, and an already declining relationship with china, these latest discussions of the possibility of sanctions against China can only entrench that view and risk for all investors.

My forecast remains 65 cents this year with risk to 58 cents against the US dollar in 2023.