The new take of the Donald Trump administration on the US trade policy is likely to affect Australia and its financial markets both directly and indirectly, as Trump takes every opportunity to criticise China, Australia’s largest import and export partner, according to Nikko Asset Management.
However, the firm stressed that the indirect impact of Trump’s trade policy would be even more important for Australia and would cause it to “suffer some collateral damage”.
According to Nikko’s co-head of global fixed income and head of Australian fixed income, James Alexander, the significant impact of the US’ future trade relations with China and a possible trade war could potentially hurt Australian trade more than Trump’s decision to exit the Trans-Pacific Partnership (TPP), which includes Australia.
As far as financial markets were concerned, he stressed that Australia’s bond yields had been traditionally strongly correlated with US Treasury yields and this was very likely to continue.
Also, if Trump’s agenda of lower taxes, increased infrastructure spending and protectionist trade policy proved to be inflationary as expected, then the US interest rates and bonds yields would likely increase and Australian bonds yields would follow.
However, according to Alexander, one of the consequences of Trump’s agenda would be a stronger US dollar while the Australian dollar, after first falling by around 2.5 per cent against the US currency, had now risen slightly, driven by a ‘trade-weighted basis’.
“This divergence, should it continue, will be one to watch carefully,” he said.
“While a weaker Australian dollar would indeed help to counter any negative impact from higher bond yields, weakness that is mainly isolated to the US dollar is not nearly as helpful as weakness on a trade-weighted basis.”
