The Australian dollar (AUD) has rallied against the US dollar (USD) in recent weeks, but has underperformed other G10 currencies.
This is mainly due to the policy of controlling the RBA’s yield curve and the downward pressure on yields.
The ongoing trade war with China won’t help sentiment, especially given Australia’s latest move, but in fact, exports to China have increased despite the restrictions.
Markets got off to a relatively slow start in the last week of April with slight gains in European equities after a mixed session in Asia which saw China drop around –1.5%. The currencies are flat with only the British pound and the Australian dollar making movements of any note. GBPUSD is + 0.3% and AUDUSD is 0.5% while EURUSD is unchanged. Meanwhile, Bitcoin is gaining attention after rebounding 10% from a low of nearly $ 47k which was officially in bearish territory (-20%) from the April high.
The coming week is packed with data, US earnings from some of the tech heavyweights, and central bank meetings of the Fed and BoJ. Many analysts expect the Fed to stay firmly in place and the US dollar’s downtrend to continue. Most central banks seem to be waiting for the Fed to look into the hawkish before doing it themselves, but the BoC went it alone last week by making significant hawkish moves by cutting QE and signaling a rate hike. at the end of 2022. If the Fed once again drags its feet this week, as widely expected, then maybe other banks will follow the BoC’s lead.
AUD under pressure
The RBA is unlikely to do anything anytime soon, mainly because the Australian dollar has performed so well over the past year. However, there are signs that its policies – particularly the control of the yield curve – are finally having an effect on the AUD as it has started to underperform in the last month or so. AUDUNZD fell -1.7% from March highs to find support at 200 dma around 1.065, while EURAUD has been making higher lows on the monthly chart since February. AUDUSD starts the week strong near 0.78, but is still below the 0.80 annual high.
And it’s not just the policies of the RBA that weigh on the Ozzie. A quiet trade war is underway with China, all sparked by Australia’s insistence China should be more open with information on the origins of Covid-19. In recent months, China has imposed import restrictions on a number of products from Australia, including charcoal, timber and red meat. Australia in turn restricted China’s access to Australian financial markets and trade agreements. Relations have deteriorated further in recent days, as reported by ING:
“The Australian government’s decision to abandon the Belt and Road Initiative (which would have allowed an increased presence of Chinese companies in Victoria’s infrastructure projects) is another worrying signal that diplomatic and trade relations between the two countries should remain fragile. The main risk for the AUD is that China will retaliate in the coming days by hitting Australian exports again. “
Yet despite the fallout, the South China Morning Post said China’s imports from Australia rose 20.9% to $ 33.73 billion ($ 44.37 billion) in the first quarter. . This was mainly due to a demand for iron ore.
“Chinese iron ore imports from Australia surged in March as demand for steel in the country’s construction and manufacturing sectors remained healthy amid a continued recovery from the slump in the country. last year, ”reports the Financial Review.
If China were to strike back with restrictions on iron ore, it could cause a major dent in Australia’s economy. Demand has ensured that this does not happen yet, but with additional supply from Brazil and demand slowing, the risk increases.
In the near term, the Australian dollar will be pulled by Tuesday morning’s CPI reading, but attention will turn later in the week to Chinese PMIs and any backlash against Australia’s latest shot in the ongoing trade war.