The Australian economic recovery is likely to be hampered once again. This time it isn't due to the pandemic but it is due to ongoing sour relations with China. The trade tensions first started in late May.
From China’s perspective, Australia is closely following the United States in exerting geopolitical pressure on China, including over the issues of Hong Kong and the South Sea. Australia actively takes part in the Indo-Pacific strategy to counterbalance China; banned Huawei from its 5G rollout by non-market means; and proposed to hold China accountable for the COVID-19 outbreak. The two countries have built up quite a bit of friction over these issues.
The deterioration in geopolitical relations certainly will have an economic impact on each country. China and Australia, now locked in acrimony, actually have very important and close trade relations. According to statistics, the trade volume between China and
Australia in 2019 was about $158 billion, while Australia’s trade surplus with China was close to $50 billion. Its exports to China were worth $103 billion, accounting for 38.2 percent of Australia’s total exports last year. Australia imported approximately $55 billion from China, accounting for 25.8 percent of Australia’s total imports, an increase of 1.4 percentage points over the previous year. China remains Australia’s largest trading partner, largest export destination, and the largest source of imports.
The situation intensified when China accused Australia on dumping its wine and barley into China and China responded by levying a tariff of 107% on the Australian wine and 73% on the barley as China claimed Australia was hurting their domestic producer of these sort of products.
Although, Australia's main export to China, iron ore has not been affected from the Chinese Tariff. This rift in tension between China and Australia has made the Australian economy vulnerable and will lead to a fall in GDP if further tariffs are imposed since Australia is heavily reliant on its exports. These tensions are expected to continue as the now the World Trade Organization is reviewing the accusations of tariffs on Australian goods in China. In light of this, I would expect the AUD to depreciate.
US crude oil inventories went into the negative region earlier this week. Implying that the US economy is on a steady state towards recovery with demand for oil in the US surging beyond expectations. The economic data was also reported to be better than analyst expectations with unemployment rate, inflation data all beating expectations. This goes to show the recovery for the US economy is looking to be stronger as compared to other economies around the world.
However, the recent FOMC statement on the 17th March 2021 showed US Federal Reserve (US FED) Chairman Jerome Powell being more dovish than expected. He decided to hold interest rates steady at 0.25% all the way till 2023.
However, this is only half the story. In the 18 member FOMC council, 7 out of the 18 member council expects the US FED to raise interest rates as early as 2022 instead of 2023. This number was up from 5 about 3 months ago. Moreover, the steepening of the yield curve to 1.64% yesterday implied that the risk of inflation is imminent. In the near future, I would expect Jerome Powell to talk about tapering off the bond buying scheme which will cause the yield curve to steepen even more. The fear of inflation will draw back investors to the USD in time to come. Powell also expects the US economy to grow by about 6% this year despite lower CPI last month he expects the economy to bounce back even stronger in the coming with more COVID-19 vaccine rollout so people can go about their daily lives more swiftly and promptly.
With the yield curve steepening and economic data looking to be better than expected. I would expect the USD to appreciate against the AUD.
On the weekly timeframe, there is a MACD divergence. The chart shows a higher high being formed but the MACD shows a lower high being formed which implies that there is an imminent reversal is about to happen.
I would recommend a sell stop call for the AUDUSD around the 0.76600 region with a first take profit at 0.73800 and a second take profit level at 0.72200 and a stop loss at 0.78100.
What exactly is a sell stop order?
A sell stop-limit represents a limit order to sell if the price falls down to, or down through, the stop price. The sell stop-limit is usually placed at a strong support and the trade will be executed once it break below the support.
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