Australian Dollar on Course for 2% Weekly Decline Aided by News of China Cotton Import Ban

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  • GBP/AUD spot rate at time of publication: 1.8257
  • Bank transfer rates (indicative guide): 1.7642-1.7760
  • Transfer specialist rates (indicative guide): 1.7998-1.8108
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Australia's Dollar was in retreat Friday amid Chinese trade hostilities, soft global markets and expectations of a Reserve Bank of Australia (RBA) rate cut.

Headlines suggesting China will stop importing Australian cotton were said to have aided declines in an already under-presssure currency.

"Trading the risk-sensitive Australian dollar has got more challenging as relations worsen between Australia and its top trade partner, China," says Robert Howard, a Reuters market analyst. 

The Aussie was a clear underperformer ahead of the weekend despite a robust performance from other risk currencies, having sustained declines against all major counterparts amid reports of fresh Chinese curbs on Aussie goods.

"While the tensions between Australia and China might escalate further, we doubt the measures alone will have a long lasting impact on AUD,” says Carol Kong at Commonwealth Bank of Australia. "AUD/USD could fall to 0.6850."

China is already reported to have discouraged domestic firms from buying coal, barley, beef and wine from Australia, which many attribute to a geopolitical dispute between the two trade partners that has seen Canbera close Australia’s 5G project to would-be Chinese participants and call for an international inquiry into the initial handling of the coronavirus, among other things.

For its part, China has ruffled Australian feathers through various alleged attempts to influence Australian internal affairs. 

CBA says products under threat so far account for only around 10% of Aussie trade with China and that it’s iron ore exports to the world’s second largest economy that matter most.

It’s thought that China would have great difficulty abandoning imports of Australian ores without also harming its overpopulated steel production sector. Chinese steel producers are also already thought to be dependent on government assistance for the sustenance of their global position. 

CBA forecasts an AUD/USD rate of 0.75 by year-end but said in late September there’s a danger that the Aussie falls short of that level, although it stood firmly behind another forecast of a 0.78 AUD/USD rate by the end of 2021. 

Above: AUD/USD, daily intervals, nears 23.6% Fibonacci retracement of March recovery & 200-day average (black line).

"AUD/USD has sold off aggressively – a negative bias remains entrenched below the short term downtrend at .7211, which continues to hold. The down trend maintains a negative bias and the near term risk remains for a slide to .6964, the 23.6% retracement. There is scope for this to extend towards the 200 day ma, the February high and mid-June low at .6789/74, which is expected to hold the downside," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Jones sold AUD/USD around 0.7224 but intends to exit the position at 0.6800.

The Aussie was still on route to 0.70 against the U.S. Dollar Friday while having also ceded ground to Sterling, leaving AUD/USD down more than -2% for the week and GBP/AUD up some 1.58% at 1.8258. 

"GBP/AUD is nearly 2% higher than yesterday’s low point, but is approaching a potentially tough resistance level just under A$1.83, where it rebounded from at the end of September,” says George Vessey, a currency strategist at Western Union Business Solutions in a Thursday note. 

GBPAUD forecast

This was after RBA Governor Philip Lowe suggested the bank might indeed cut its cash rate as far as 0.10% soon, and also expand its bond buying programme to tackle bond yields that are among the highest in the developed world

Yields have helped drive a 2020 rally in the antipodean commodity Dollars that further threatens central bank inflation targets and economic recoveries. Rising exchange rates incentivise economy-eating imports by making them cheaper, while also cutting consumer price inflation and hampering exports having made the latter more expensive. 

The RBA successfully crushed and contained short-term yields during the first half of 2020 in response to the coronavirus that other policymakers have been much less successful in containing. Moving out along the yield curve could at least temporarily deliver a further setback for the Aussie. 

Above: AUD/USD at hourly intervals alongside 10-year Australian government bond yield (black line, left axis).

“Steps taken to curb a resurgence of COVID-19 in Europe and the US are likely to draw some focus, as they impact near-term growth expectations and establish a precedent for containment heading into the northern hemisphere’s winter. At the same time, the US election should remain a source of volatility given the vastly contrasting long-term growth outcomes under each President/Congress combination,” says Daniel Been, head of FX research at ANZ. “We remain open minded to further downside in cyclical currencies with a view to buy into weakness for those with a medium-term horizon.”   

With trade and interest rate factors aside, a second wave of coronavirus in Europe, where restrictions on activity have been ramped up anew across major economies this week, will be a key focus for investors going forward and could have implications for the Aussie because of its effect on sentiment. 

Deteriorating risk appetite among investors has a way of being reflected by lower prices for shares and reduced exchange rates for commodity and risk-linked currencies like the Aussie.

On top of that, there’s growing uncertainty about the outcome of the November U.S. election, which could dictate global demand for the U.S. Dollar for years to come, and an ongoing Brexit saga for currency markets to contend with. 

NAB wrote earlier this week that any eventual trade deal agreed with the EU could lead GBP/AUD to rise to 1.85. It was quoted at 1.8257 on Friday.

“It seems unlikely that the UK side will walk away this weekend, but a vast majority of market participants seem to believe a deal is likely. That leaves me nervous of further sterling weakness, despite CFTC data suggesting speculators remaining short. A GBP pre-weekend wobble would be a catalyst for EUR/USD to suffer a further swoon. The silver lining to that is that a modest move down may be finally sorting out the overhang of euro longs,” says Kit Juckes, chief FX strategist at Societe Generale.

Above: Pound-to-Australian Dollar rate, daily intervals, approaches 23.6% Fibonacci retracement of April decline. 


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