Australian Dollar Stalls with Global Markets while China Targets Wine with Tariffs

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The Australian Dollar stalled with global markets on Thursday and could be susceptible to profit-taking if investor risk appetite continues to ebb given its recent outperformance and a further souring of relations with China, which targeted Australian wine exports with tariffs in the overnight session. 

Australia's Dollar had rallied overnight amid reports of robust demand for newly issued government treasury notes, which sold with a negative yield for the first time after investors bid for more than five times the amount of new debt that was issued, although the auction and currency move also came amid further commodity price strength.

"AUD outperformed across the board," says Joseph Capurso, a strategist at Commonwealth Bank of Australia. "With the iron ore price on a bull run, AUD is largely ignoring the ‘bad’ news. For the first time, the Australian government issued debt at a negative yield. But as our rates analysts explain here, the yield on the three month bill swapped back into USD is positive and attractive. According to the Australian media, the Chinese government may restrict imports of Australian honey, fruit and pharmaceuticals."

The Australian Dollar was running out of steam ahead of the European open however, after having taken another run at the 0.75 level against the U.S. Dollar, although escalating trade tensions with China and ebbing risk appetite in global markets may have left it in a position of vulnerability.  

China's Ministry of Commerce said Thursday that "The investigation authority preliminarily determined that there is a subsidy for imported wines originating in Australia, the domestic wine industry has suffered substantial damage, and there is a causal relationship between the subsidy and the substantial damage," before announcing that tariffs will soon be imposed on all Australian wines that are imported in containers of 2 litres or less.

Above: AUD/USD at hourly intervals with S&P 500 index futures (black line).

"Westpac has lifted its growth forecasts and lowered its unemployment outlook; the Consumer Sentiment Survey is supporting that view; Trade tensions are unlikely to threaten that success," says Bill Evans, chief economist at Westpac.

Evans' FX strategy colleagues told clients on Thursday they "would look to add long AUD on dips to 0.7325/50." 

Thursday's tariff announcement had been rumoured in the Australian and Chinese press for a while, and wine makers are not the only Aussie exporters to be targeted by Beijing as it retaliates against Canberra for its foreign policy and statements about the country's handling of the coronavirus outbreak in Wuhan. 

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Canberra's 2018 decision to exclude Huawei from its 5g network infrastructure marked a step-change in the relationship with China, although the world's second largest economy only really began to lash out in earnest after Prime Minister Scott Morrison called for an independent investigation into Beijing's initial handling of the coronavirus.

Since then its targeted, or been reported to be eyeing, a range of exports including coal, beef, barley, copper and sugar among others, although local economists say it's the all-important iron ore trade that really matters for the Australian economy and Dollar. 

Westpac said earlier this week that the risk of fresh tensions with China was underpriced by the Aussie Dollar after lawmakers in Canberra passed the Foreign Relations State and Territory Arrangement bill, which could nullify a 'Belt and Road' investment agreement between Victoria state and China.

Above: AUD/USD at weekly intervals with Fibonacci retracements of 2018 fall indicating possible technical resistance/targets.

"The unseasonal fall in Australia’s iron ore exports have raised concerns that China may be restricting imports from Australia. And while those concerns may be justified given Australia’s coal and copper concentrate exports to China have faced unofficial restrictions already this year, we think it’s too premature to make a similar call for iron ore," says Vivek Dhar, a commodity strategist at CBA. "China has very few alternatives to replace Australian iron ore...it makes little sense for China to apply unofficial restrictions when iron ore prices are at 7‑year highs. It would unnecessarily hurt China’s steel sector." 

As tensions with China fester in the background the Australian Dollar will also contend on Thursday with ebbing risk appetite among investors and flagging global stock markets, which have been taking their cues from perceived rising and falling odds of another fiscal stimulus package being agreed in the U.S. among other things. 

Senators are expected to vote on a proposal to keep the federal government funded this Thursday, averting another government shutdown, although negotiations over further support for households and companies are ongoing.

If lawmakers fail to agree a new package, the risk of a U.S. Dollar rebound would grow and with it, the negatively-correlated Australian Dollar's vulnerability to a correction lower. However, technical analysts at Commerzbank said Thursday the Aussie should find itself supported by the 20 day moving-average at .7366 following any sell-off. They're also forecasting and Australian Dollar rally to new highs of 0.7639 on a one-to-three week horizon. 

"AUD/USD remains extremely bid despite the recent high not being confirmed by the daily RSI. It is reached the .7484 July 2018 peak and will need to close above here for another leg higher. It stays immediately bid near term while above the 20 day ma at .7366. We look for a move to the long term Fibonacci retracements at .7574 and .7639. These are the break points longer term for the 2018 peak at .8135," says Karen Jones, Commerzbank's head of technical analysis for currencies, commodities and bonds.