AUD: Caught in the middle? – Rabobank

In view of Jane Foley, Senior FX Strategist at Rabobank, there is the risk that a trade war could raise difficult choices for Australia between its largest trade partner and its largest defence ally.  

Key Quotes

“Equally, however, there is a risk that Australia will have very little bargaining power, meaning it may have little control on how a US/China trade war impacts its domestic producers.”

“Just as some producers in Australia are looking for new opportunity in China as tariffs threaten to increase prices of some US products, others may suffer heavily as US goods are dumped in local markets lowering prices. More generally there is risk that demand for Australia products could stall if growth in China slows as a result of the US’s attempt to improve its trade deficit.”

“The uncertainties connected with trade provide a good reason for the RBA to remain watchful going forward.”

“Since its high in late February the value of AUD/USD has dropped around 8.8%. Much of this move is the result of a broad based rise in the value of the USD.   That said, since the start of February the AUD is the third worst performing G10 currency after the SEK and the CAD.”

“A re-evaluation in the market about the outlook for RBA policy this year and a drop in risk appetite has also impacted the AUD in recent months.   In view of our concerns about the impact of trade wars and in view of our expectations of steady RBA policy well into next year, we see further downside potential for AUD/USD towards 0.72 on a 12 mth view.”