Australian Dollar Forecast to Maintain Upside Impetus Courtesy of Global Equity Market Resilience, but Chinese Beef Ban Signals Potential Trade Strife Ahead

- Chinese beef ban creates ripples for AUD
- Softer stock market sees AUD lose ground
- But, market outlook remains constructive says ING
- Expect AUD weakness to be limited

Australia beef

Above: Australian cattle station. Image © Adobe Images

Aussie flag - GBP/AUD spot rate at time of writing: 1.9050
- Bank transfer rates (indicative guide): 1.8380-1.8500
- FX specialist transfer rates (indicative guide): 1.8605-1.8880 >> more information

The Australian Dollar is trading lower against its G10 peers at the time of writing courtesy of a softer tone to global stock markets, but we are told by one analyst that markets are likely to remain resilient and this should in turn ultimately support the Aussie currency.

Markets are in the red on Tuesday amidst an air of caution amongst investors who appear wary of chasing the recovery in stocks any further in light of recent covid-19 flare-ups in countries that had been assumed to have defeated the virus.

Fresh cases in Wuhan and South Korea have been reported while the reproductive rate of the virus in Germany appears to have spiked following the lifting of lockdown measures.

"Stocks throughout Europe and the U.S. are in the red once again as the optimism over the easing of lockdown restrictions is tempered by fears over a second wave. German experience will serve as a warning sign for nations hoping to reopen, with the country seeing a sharp rise in infections once lockdown measures were gradually lifted. The German ‘R’ rate of 1.1 means that cases and deaths are now predicted to rise, thus putting the buffers on any plans to further ease restrictions," says Joshua Mahony, Senior Market Analyst at IG.

How stock markets behave matters for the Australian Dollar which is highly reactive to broader sentiment, tending to rise against most of its major peers when stock markets are rising and fall when markets are losing value.

"The key risk factors for AUD this week are: a) externally, signs of second contagion waves in those countries that eased lockdown measures early and any escalation in US-China tensions," says Francesco Pesole, FX Strategist at ING.

At the time of writing the Pound-to-Australian Dollar exchange rate is quoted a quarter of a percent lower on the day at 1.9050, the Australian-to-U.S. Dollar exchange rate is meanwhile quoted 0.20% lower at 0.6470.

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The Aussie Dollar's link to global investor sentiment is understandable given that Australia's economy is highly leveraged to the global growth story - and China in particular - courtesy of its heavy export base.

On this note, domestic sentiment towards the Aussie currency deteriorated somewhat on news that China has suspended meat imports from four Australian companies that make up 35% of the country’s beef exports to China.

Beef is Australia's 8th largest export, accounting for 2% of the countries total export basket, according to Australia's Department for Foreign Affairs and Trade.

The move by China to ban what is effectively in the region of 35% of beef imports from Australia represents an escalation in tensions between the two countries after Australia called for a probe into the origins of the covid-19 pandemic.

It comes after China's ambassador to Australia said in a newspaper interview on April 27 that the Australian government's pursuit of an independent international inquiry into the coronavirus outbreak could spark a Chinese consumer boycott of students and tourists visiting the country, as well as sales of major exports including beef and wine.

Ambassador Cheng Jingye told The Australian Financial Review in an interview that Australia's push for an inquiry was "dangerous" and predicted it would fail to gain traction among global leaders.

However, according to Australian Trade Minister Simon Birmingham, the Government was notified yesterday about the suspensions, which Chinese authorities linked to labelling and health certificate requirements.

He said he was concerned the suspensions were due to "highly technical issues", some of which dated back more than a year, arguing changes to export arrangements should be considered separately to the merits of an investigation into COVID-19.

We would imagine that while the ban has been blamed on technical issues Australian authorities will be in no doubt that China is flexing a bit of muscle, signalling that it has significant leverage over Australia's economic fortunes via the trade channel.

The developments concerning Australian beef follows weekend news reports that China is considering imposing hefty tariffs on Australian barley imports. However, for now it remains too soon to confidently suggest the two countries are headed for the kind of 'Cold War' on trade that we have seen between the U.S. and China, but we would suggest that this is certainly a risk on the Aussie Dollar's radar.

Pound to Aussie Dollar

Above: GBP/AUD daily chart

ING's Pesole says that the Australian Dollar should remain well supported moving forward, provided global stock markets extend their multi-week recovery.

"The resilience in global equities may continue to provide steam to the Australian Dollar which (as we highlighted in recent publications) is well poised to keep leading the pack, if sentiment continues to improve," says Pesole.

According to Pesole a low domestic contagion of the covid-19 virus and "not too-dovish" Reserve Bank of Australia are likely to help aid sentiment towards the Aussie currency while resilience in iron ore prices and Chinese demand for Australia's most important export is also likely to aid.

If the analyst is correct, the current bout of Aussie Dollar weakness should prove to be short-lived.

However, potential trade tensions between China and Australia, as well as between China and the U.S. remain real risks on the horizon for readers to take account of. Warnings from analysts that another bout of stock market weakness owing to the covid crisis is another factor to be conscious of.

The prospect of a slip in global markets as valuations fall to meet the economic reality posed by the crisis remains a distinct possibility over coming weeks, and under such a scenario we would expect the Australian Dollar to come under pressure.

"In the near-term we expect another wave of risk-off in financial markets as markets are in our opinion too optimistic currently on the speed and strength of economic recovery," says Georgette Boele, Senior FX Strategist at ABN AMRO. "There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency."

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