The Australian dollar tanked

Clive Rose/Getty Images
  • The Australian dollar went hard into reverse on Thursday, giving back all of Wednesday’s gains.
  • A combination of heightened trade tensions between the US and China, along with lower commodity prices and a surprise lift in Australian unemployment, explained the Aussie’s slide.
  • There are few major data releases scheduled on Friday, likely ensuring that headlines and sentiment will dictate market direction.

The Australian dollar fell heavily on Thursday, reversing all of Wednesday’s substantial gains.

Here’s the scoreboard as at 7.50am AEDT.

AUD/USD 0.7692 , -0.0073 , -0.94%
AUD/JPY 80.97 , -1.35 , -1.64%
AUD/CNH 4.8758 , -0.0178 , -0.36%
AUD/EUR 0.6252 , -0.0039 , -0.62%
AUD/GBP 0.5455 , -0.0034 , -0.62%
AUD/NZD 1.0666 , -0.0068 , -0.63%
AUD/CAD 0.996 , -0.0056 , -0.56%

New tariffs on Chinese imports introduced by the United States, along with sharply lower commodity prices and a surprise lift in Australia’s unemployment rate in February, largely explain the Aussie’s substantial losses,” says Elias Haddad, Senior Currency Strategist at the Commonwealth Bank.

“The tariffs on Chinese imports outlined by President Donald Trump overnight appears to be the trigger behind [the Australian dollar’s] moves,” he says.

“The President instructed the US Trade Representative (USTR) to levy 25% tariffs on at least $50 billion in Chinese imports per year. The proposed product list subject to the tariffs will include aerospace, information and communication technology, and machinery.”

Dhar says that while, in isolation, the tariffs are unlikely to have much of an impact on the US economy, they do pose the risk of sparking a trade war between the world’s two largest economies.

“This could lead to retaliatory protectionist trade measures from the rest of the world, and potentially derail the current synchronised expansion in global economic growth,” he says.

As a small, open economy closely tied to the performance of the global economy, this helps explain the sharp reversal in the Australian dollar seen during the session.

Along with the potential threat of a global trade war, Haddad says weaker commodity prices also played a role in the Aussie’s decline.

“The global equity market sell off and lower commodity prices are weighing on AUD,” he says.

Further compounding the Aussie’s losses, Haddad says a surprise lift in Australian underemployment and labour force underutilisation in February, also delivered a negative impact, casting doubt as to whether Australian wage pressures will build sufficiently to help boost inflation and economic growth.

“Australian employment report showed there was still plenty of labour market slack left in the economy,” Haddad says.

“Australia‚Äôs underemployment rate edged up 0.1 percentage points to 8.4% in February. This will limit a significant pick up in wages growth and limit upward revisions to Australian interest rate expectations.”

Combined with geopolitics and lower commodity prices, that explains why the AUD/USD is now back above the 77 cent level less that 24 hours after it was threatening to break above 78 cents.

AUD/USD Hourly Chart

Turning to the session ahead, the data calendar is light, likely ensuring that headlines relating to geopolitics will continue to dictate sentiment and market direction.

In Japan, consumer price inflation data for February is the only notable release in Asia.

Later in the day, highlights include US durable goods orders and new home sales for February, the release of the latest quarterly bulletin from the Bank of England along with CPI and retail sales data for Canada.

While the latter carries the potential to shift the CAD against the crosses, the remaining data releases will likely play second fiddle to sentiment and headlines relating to trade policy.

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