Chief economist update: RBA heading to zero

Trump's latest tat (branding Beijing a currency manipulator) for China's tit (allowing the yuan to fall below the psychological threshold of CNY7.0/US$1) highlights just how determined the US president is to win the trade war.

Yes Virginia, China's officially a "currency manipulator" in America's eyes - not when it was intervening to keep the yuan from depreciating but now that it has allowed market forces to discover the currency's true value.

As The Economist explains: "The IMF, which monitors countries' external imbalances, recently concluded that China's external position was broadly in line with fundamentals. Even by the Treasury's own formal criteria, China does not seem to be a currency manipulator."

"To qualify under the Treasury's "enhanced monitoring" system, a country has to have a significant bilateral trade surplus with America and a material current-account surplus, and to have made a "persistent, one-sided intervention in foreign-exchange markets".

"Mark Sobel, a former official who oversaw the Treasury's currency-manipulator monitoring for 14 years, and is now at the Official Monetary and Financial Institutions Forum, a think tank, notes that China meets only the first of those three conditions."

But I digress. The recent exchange of fire sent global equity markets around the globe down, lopping A$53 billion off the Australian equity market on the same day the Reserve Bank of Australia (RBA) held its August board meeting.

As expected, the RBA kept interest rates on hold at 1% following its back-to-back 25 bps interest rate cuts in June and July.

The re-escalation of the trade war between Beijing and Washington gave meat to its statement that "the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside".

This should keep its policy bias towards further easing, the RBA's recent growth downgrade to 2.5% in 2019 (from 2.75% forecast in May) makes it highly likely that it would announce another one (or two or three?) reduction in interest rates. Financial markets expect the RBA to cut interest rates by another 25 bps to 0.75% at its November 2019 meeting.

While the RBA remains optimistic "the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector" would support the domestic economy, it remains unsure about "the outlook for consumption".

More so, given "wages growth remains subdued and there is little upward pressure at present', exerting little upward pressure on inflation.

Putting all these uncertainties together (and Murphy's Law and Trump), it wouldn't be surprising to see the official cash rate at or near zero per cent next year.

A bit extreme perhaps, but this time last year no one expected the Fed to cut interest rates nor the RBA to chop the official cash rate ... and in two quick successions, at that.

Read more: USChinaTreasuryTrumpAmericaBeijingEconomistLawMurphyAugust BoardFedFinancial Institutions ForumIMFMark SobelOfficial MonetaryReserve Bank of AustraliaWashingtonYes Virginia
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