Trouble brewing down under?

by Giles Coghlan, Chief Currency Analyst at HYCM

AUD to feel the pressure?

The medium-term outlook for the AUD is only going to weaken if the US-China trade dispute grows. The reason for this is because Australia is the most China dependent major developed economy. Tensions have not only been growing between China and the US with President Trump to hold a press conference on China later this afternoon, but tensions have been mounting between Australia and China after Australia announced it would like an investigation into the origin of the outbreak of COVID-19.

The country of China is the largest export market for Australian barley. In China, it is used to make beer, feed livestock, and in the last financial year, China imported 2.5m tonnes of barley from Australia. If Chinese tariffs are continued on Australia they are likely to bring significant pain to the industry. According to the Australian grain industry, they issued a statement that the new tariffs could cost the industry $A500m per year.

This tariff move from China is in addition to import bans on Australia's beef shipments and looks set to weigh on the AUD going forward. Furthermore, the increasingly aggressive posturing from China and the US means further trade disputes seem almost inevitable now. Any action by either party would weaken the AUD as Australia has around 30% of its GDP from its trade with China.

Positive vaccine news nearly priced in?

20+ companies are now working on vaccines or treatments for COVID-19, so the good news of a vaccine is increasingly becoming 'priced in' and this will make the market more sensitive to negative US-China/China-Australia trade news. Remember how the US-China trade narrative was the dominant driver through markets in 2019. So, looking at the AUDJPY pair it is rejecting its 200DEMA and that would be a near term place to limit risk as it is also a key pivot point on the daily chart.
However, be aware that if President Trump's promised actions against China, due to be announced today, are seen as gentle or only rhetorical then AUD can still rise on the global growth recovery hopes. The 200DEMA on the daily chart provides a near term crossroads and place to limit risk.

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