The AUD/USD bulls fear the introduction of import duties on Chinese goods
Between a rock and a hard place. This is how one might describe the position of the Australian dollar. On the one hand, the pressure on it is created by the normalization of the monetary policy by the Fed, which increases the cost of borrowing in the United States, makes the resources attracted by Australian banks more expensive, tightens credit conditions, reduces its volumes and prevents the acceleration of inflation. At the same time, the spreads on debt obligations of Australia and the US are narrowing, which restricts the flow of capital and throws sand in the wheels of the AUD/USD bulls. The trade wars are no less of a problem.
China is the largest market for Australian goods, and even the devaluation of the Aussie will not be able to compensate for the economic slowdown in China under the influence of trade conflicts with the United States. First, Beijing is ready for compromises in the form of increased purchases of American goods, which could potentially reduce Australian exports. Secondly, the devaluation of the yuan increases the cost of imports in China, which increases the risks of reduced demand for foreign goods. The exporters' problems create pressure on the Aussie. A typical example is the events of April 2015 and January 2016, when the growth of the USD/CNY became one of the factors of the AUD/USD downfall.
Dynamics of the Australian dollar and the Chinese yuan
Source: Trading Economics.
Coupled with an unfavorable external background, the unwillingness of the Reserve Bank to increase the cash rate forces speculators to increase net short positions in the Australian dollar. At the last meeting, the RBA noted that it does not intend to tighten monetary policy until the improvement in the labor market results in accelerating wages. The regulator no longer speaks of the overvalued rate of the Australian dollar, but notes that it is weakened but is within the trading range of the last two years.
Dynamics of the AUD/USD and speculative positions in the Aussie
Given the pessimistic outlook for the Aussie and the potential increase in demand for the Japanese yen as a safe haven in the face of escalating trade tensions, the AUD/JPY sales strategies are popular. The pair has already fallen by 6.7% since early 2018. According to Shinkin Asset Management, it will continue to decline in the direction of 70.
In fact, everything will depend on the development of the trade conflict between the US and China. If the introduction of import duties at $ 34 billion starting July 6 does not lead to its escalation, then the Aussie might consolidate in the range of $ 0.726-0.752. At the same time, there are risks that a large-scale trade war will force the Fed to change plans for normalization of monetary policy because of the potential slowdown in the US economy. As a result, a drop in yield of Treasury bonds will create prerequisites for the correction of the AUD/USD.
The AUD/NZD buy strategy with a target of 1,115 looks interesting in the conditions of growth of the rate differential of the debt markets of Australia and New Zealand and the pigeon rhetoric of the RBNZ. The regulator noted that there were more available capacities in the economy than previously expected. This allowed the futures market to take into account the likelihood of the New Zealand cash rate lowering.
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