- The Australian dollar has fallen sharply upon the resumption of trade on Monday morning.
- US President Donald Trump has dramatically escalated trade tensions with China, tweeting that tariffs on hundreds of billions worth of Chinese goods entering the US could increase as soon as Friday.
- The response from China to Trump’s trade threat will determine how markets, including the Aussie dollar, will fare in the coming days.
The Australian dollar has been slammed upon the resumption of trade on Monday morning, tumbling in response to a sharp and unexpected escalation in trade tensions between the United States and China.
First, here’s the scoreboard at 7.50am in Sydney on Monday morning.
AUD/USD 0.6981 , -0.0042 , -0.60%
AUD/JPY 77.18 , -0.85 , -1.09%
AUD/CNH 4.7398 , 0.0103 , 0.22%
AUD/EUR 0.6239 , -0.0029 , -0.46%
AUD/GBP 0.5304 , -0.0024 , -0.45%
AUD/NZD 1.0549 , 0.0005 , 0.05%
AUD/CAD 0.9393 , -0.0027 , -0.29%
And here’s the reason why the Aussie has fallen heavily against most major crosses, particularly the US dollar and Japanese yen.
….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
— Donald J. Trump (@realDonaldTrump) May 5, 2019
Having lulled markets into a sense of security that a trade deal between the two nations was imminent, Trump’s tweets suggest anything but, wrong-footing traders who had all but priced in a a palatable solution being reached between the two sides.
Indeed, the threat to slap 25% tariffs on an additional $325 billion worth of Chinese exports entering the United States is the last thing markets had been expecting, going beyond the $200 billion worth of goods that were previously earmarked for a possible increase from 10% to 25%.
The question many are asking at this point is the threat plausible or simply a negotiating tactic to speed up an agreement being reached?
China’s response in the coming days days will likely go a long way to answering that question, especially with the latest round of trade talks between the two sides scheduled to resume in Washington this week.
“Focus now turns to Asian markets reaction and any response from China, but if recent history is any guide we suspect we are unlikely to see a swift response from China today,” said the NAB’s currency strategy team.
“An aggressive response from China that halts current negotiations, with higher tariffs by the end of the week, would be a disaster for risk assets.”
Following Trump’s tweets, White House economic adviser Larry Kudlow described the move as a warning to the Chinese trade delegation team.
“The president is, I think, issuing a warning here, that, you know, we bent over backwards earlier, we suspended the 25% tariff to 10 and then we’ve left it there. That may not be forever if the talks don’t work out,” he told Fox News.
That likely explains why the Australian dollar hasn’t completely fallen out of bed in early trade on Monday morning.
Looking ahead, movements in currency markets are likely to be dictated by trade headlines despite some major economic and central bank events in the days ahead.
On Monday, Australian data releases include ANZ job ads and the Melbourne Institute’s inflation gauge for April.
Regionally, most interest will be on the Caixin-IHS Markit China services PMI for April that will be released at 11.45am AEST.
The performance of Chinese markets will also be influential on how the Aussie dollar will perform in the first half of the session, especially with Japanese markets remaining closed for public holidays.
Later in the day, other highlights include composite PMIs from across Continental Europe along with Eurozone retail sales and investor sentiment are the headline data acts.
On the central bank front, Williams, Harker and Evans from the Fed will be in action, as will Stephen Poloz from the Bank of Canada.
The AUD/USD currently trades at .6981 having fallen to as low as .6965 earlier in the session. It now sits at the lowest level since January 3 this year.
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