Australian Dollar Softens After China Pulls the Trigger
- Written by: Gary Howes
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Image © Adobe Stock
The Australian Dollar trends lower in response to news China has retaliated to U.S. import tariffs.
Global equity markets and commodity prices have fallen after China announced a targeted retaliation against the U.S., confirming a new trade war officially gets underway on Tuesday, February 04.
China-exposed proxies, such as the Australian Dollar, reflect these developments by extending near-term losses against most G10 peers.
The day brings new U.S. import tariffs imposed on Chinese goods and a Chinese retaliation: it will levy new tariffs on a range of American imports, including a 15% levy on coal and liquefied natural gas. Crude oil, agricultural machinery, large-displacement cars and pickup trucks now face a 10% tariff.
"AUD/USD and NZD/USD fell modestly in response to China’s retaliatory tariffs on its US imports. Both currency pairs are sensitive to tariffs on China given their high exposure to Chinese domestic demand. The US‑China trade conflict has further to run in our view. Presidents Trump and Xi have not yet talked about averting tariffs. We see rising risks AUD/USD falls below 0.60 sooner rather than later," says Kristina Clifton, Senior Currency Strategist at Commonwealth Bank of Australia.
A number of U.S. companies were sanctioned as "unreliable entities", including Calvin Klein and Tommy Hilfiger owner PVH, as well as Illumina (a gene sequencing company).
The Chinese measures announced also include export control on tungsten-related materials, a crucial raw mineral of which China produces about 80% of the world's supply.
China is the first Trump target to refuse to seek compromise in the face of his threats. Earlier, Canada and Mexico agreed with the U.S. to bolster their border security forces and squeeze the flow of drugs and illegal migrants into the U.S., which pleased the new U.S. President.
But it was not clear where China would have been able to negotiate away the tariffs as the issues Trump is seeking to address differ from those facing Canada and Mexico. Trump sees tariffs as a tool to 1) influence domestic outcomes, 2) raise revenues and 3) rebalance trade.
Objective one primarily covers Canada and Mexico, objectives two and three apply to China, and it's clear that here, there is limited room to negotiate.
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"The U.S's actions seriously undermine the rules-based multilateral trading system, undermine the foundation of economic and trade cooperation between China and the United States, and disrupt the stability of global industrial and supply chains," China's Commerce Ministry said in a statement.
The dour tone in global markets confirms investors think we are only at the beginning of the global trade readjustment under Trump, and the threat of a universal tariff on all U.S. imports remains alive. For the Aussie Dollar, this poses more downside via its exposure to China.
That being said, the selloff is not dramatic and is a slow burn: Trump is clearly open to negotiation, and the threat of countermeasures by other countries will cause reason to tread carefully to avoid hurting domestic consumers.