Introduction

Recently, an alarming statement from the Commonwealth Bank of Australia (CBA) has garnered significant attention in the financial markets. The backdrop is the U.S. presidential candidate’s proposal to raise tariffs, elevating tensions in global trade (a process some are calling de-globalization). As a consequence, the Australian dollar (AUD) could potentially dip below the exchange rate of 0.6 USD for 1 AUD. If such a drop occurs, it would mark the lowest level the currency has reached since 2003.

This projection serves as a critical warning signal for investors worldwide.

Escalating Uncertainty in Global Trade

The Australian dollar, being one of the key currencies in global trade, is particularly sensitive to the fluctuations in the international economic landscape.

Recent developments saw a 25% tariff imposed on imports from Mexico and Canada, coupled with an additional 10% tax on goods from China.

Moreover, warnings have been issued that if BRICS nations attempt to undermine the dollar's dominance, the U.S. will respond with tariffs of up to 100% on their products.

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This aggressive series of trade measures could propel the global trade system into disarray and contribute to a further strengthening of the dollar as a safe-haven currency.

This situation undoubtedly places the Australian dollar under dual pressure.

On one side, the AUD, often classified as a risk currency, has been at odds with the U.S. dollar’s vigorous performance.

On the other, Australia’s economy heavily relies on exporting bulk commodities to countries like China, and an escalation in trade tensions could weaken the market demand for these goods.

Dollar Strength Suppresses AUD: CBA's Pessimistic Outlook

The current robust performance of the U.S. dollar is significantly pressuring the Australian dollar. Thanks to strong manufacturing data from the U.S., the dollar index recently climbed to a peak of 106.4, just shy of the two-year high of 107.5.

In contrast, the AUD/USD exchange rate has plummeted by 7.3% since its highs in September, recently hitting a four-month low of 0.6432.

CBA released their forecast report on Tuesday, indicating a rapid shift in their expectations for the future trajectory of the AUD.

The latest forecasts suggest that the AUD could fall to 60 cents against the USD by 2025, or possibly even lower.

Previously, CBA had been optimistic, predicting the AUD would rebound to 70 cents by the end of 2026, but they now contend that such recovery may be unlikely.

Joseph Capurso, the bank's head of international economics, noted:

“If the scale of the global trade war exceeds expectations and leads to further destructive impacts, the downward trend in the AUD may intensify and come quickly.”

Is a Sub-60 Cent AUD a Reality?

As to whether the AUD will indeed fall below 60 cents, CBA’s grim expectations undoubtedly highlight potential risks. Other market participants, like the National Australia Bank (NAB), have echoed similar cautions, asserting that such a scenario is not entirely far-fetched.

However, I personally do not share such pessimism. Of course, we are examining it from a different timeframe, reflecting on the future trajectory of the AUD from a macroeconomic perspective, perhaps considering the next four to eight years.

Let’s turn our attention to the issue of bringing U.S. manufacturing back. The U.S. has implemented tariff increases to encourage manufacturers to return, or they face hefty tariffs.

However, whether tariffs alone can effectively resolve the issue of bringing back manufacturing is debatable.

Given that a strong dollar results in higher manufacturing costs and expensive labor in the U.S., even if capitalists were exempted from the additional tariffs, their profits might still struggle to compete with maintaining overseas production. This raises questions about the economic viability of bringing factories back to the U.S.

So, do tariffs truly facilitate the return of manufacturing? Reflecting on the trade war of 2018 could yield some insights.

Following the imposition of massive tariffs by the U.S. on China, the intent was to elevate costs and suppress China’s export industry.

Nevertheless, China’s strategy of currency devaluation, which reduced its currency's value by 20%, successfully alleviated the pressures imposed by tariffs.

This begs the question: What is the core issue up for negotiation? In essence, the currency exchange rate is integral to resolving these conflicts.

This series of actions has led to an increase in the issuance of U.S. government bonds, thereby maintaining high U.S. bond yields to support the dollar’s stronghold.

In pursuing the natural repatriation of manufacturing back to the U.S. (a weaker dollar reduces U.S. production costs), the opposing country's currency must appreciate.

The U.S. has considerable interests in Europe, necessitating a more robust control over that region.

Currently, as the dollar strengthens and the euro depreciates against other currencies, the European economy is gradually recovering.

However, from America’s perspective, it requires a stronger euro.

The appreciation of the euro, a significant component of the dollar index, will inevitably lead to a depreciation of the dollar.

With only a few months left in the Democratic administration, the dollar may be nearing its peak.

Historically, it has been observed that the dollar appreciates during Democratic tenures and depreciates under Republican leadership.

Returning to the discussion on the AUD, in the short term, the emergence of a new Juglar economic cycle and the apparent short-term rebound in China’s credit pulse suggests that Australia’s currency, as a commodity exporter, should retain some strength.

Conclusion

Certainly, we cannot dismiss the possibility of the dollar appreciating in the short term due to the imposition of tariff policies.

However, viewed from a long-term perspective, should we really maintain a pessimistic stance on the future of the AUD?