China is Australia’s main trading partner, while the US is its primary military ally. The Australian dollar is sensitive to the yuan and the S&P 500 index. As a result, the AUDUSD pair plummeted on the news of 100% tariffs. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US imposes 100% tariffs on China.
- The S&P 500 index has posted its worst performance since April.
- The aussie has received a double blow.
- Long trades on the AUDUSD pair can be opened if the pair settles above 0.649.
Weekly Fundamental Forecast for Australian Dollar
Although the trade war has not officially begun, the damage has already started to occur. The S&P 500 index has fallen at its fastest pace since April, and global risk appetite has deteriorated. Coupled with concerns about the Chinese economy’s future, this has pushed the AUDUSD rate to its lowest level since the end of summer. It could have been worse. Notably, the Australian dollar plunged after the US administration imposed 145% tariffs on China on Liberation Day.
After losing the first trade war during Donald Trump’s previous term as president, China started the second one as an obvious weak contender. The increase in tariffs did not bode well for Beijing in 2018–2019, so this time, other strategies were adopted. First and foremost was the redirection of exports. Exports of goods from China to the US decreased by 17%, yet total exports increased by 8.3% in September. This growth bolstered Beijing’s confidence, enabling it to tighten export controls on rare earth minerals.
Australia is at the epicenter of events. China is Australia’s main trading partner, while the US is its key military ally. Therefore, the AUD/USD pair is sensitive to global risk appetite, which depends on US stock indices, as well as China’s macro statistics. At the same time, Canberra’s attempts to walk a tightrope are unlikely to end well.
Fed Funds Rate and RBA Rate
Source: Bloomberg.
One could safely buy the AUDUSD pair if it weren’t for external factors. According to RBA Governor Michele Bullock, the Australian economy is in good shape, with inflation within the target range of 2–3% and a strong labor market. Assuming no changes occur by the end of the year, the cash rate will likely remain at 3.5%. By then, the federal funds rate is expected to fall by 50 basis points, according to the derivatives market. Divergence in monetary policy strongly suggests entering into long positions on the Australian dollar against its American counterpart.
Australian CPI
Source: Bloomberg.
History shows that tariff increases can be devastating for the US economy. As a rule, US companies and consumers take most of the damage. At the same time, the “Sell America” strategy, which became popular after the US administration announced tariffs in April, allowed the AUDUSD pair to recover from its five-year low. After that, TACO trading began.
Investors will likely witness another déjà vu. Indeed, Donald Trump has overreacted and will retreat, at least to avoid damaging his beloved US stock indices.
Weekly AUDUSD Trading Plan
Considering divergence in monetary policy, the AUDUSD pair can be purchased if it consolidates above 0.649. A return to this level followed by a breakout will dramatically change the balance of power. Sales driven by fears of an escalating trade war will become relevant.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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