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Sean Callow, Research Analyst at Westpac, explains that it is impressive for the Australian dollar to be the third strongest G10 currency over the week, which seems to augur well for AUD on crosses near term.

Key Quotes

“Trade tensions have picked up in recent days. Despite US treasury secretary Mnuchin declaring that a trade war with China has been “put on hold”, later in the week the US announced an investigation into imposing tariffs on imports of motor vehicles on national security grounds, despite nearly all such imports coming from supposed US allies. The steel and aluminium tariffs justified on the same grounds are due to commence this Friday, hitting Europe and others.”

“These US tariffs do not apply to Australia but we have fresh concern over China’s trade policies. Last week Chinese state-owned media called for a “cooling” of Sino-Australia relations on political grounds.”

“There is also risk aversion evident in emerging markets such as Turkey and Argentina.”

“Such strains are a weight on AUD/USD but otherwise, the Aussie’s foundations look decent. The RBA’s optimistic growth outlook is well understood and contrasts with recent more dovish notes from the RBNZ, ECB and BoE. Construction data last week leaves Australian Q1 GDP (6 June) on track for growth in at least the high 2%yr area, even 3%. This week’s business investment data (private new capex) will help shape GDP forecasts further.”

“This should leave markets pricing a good chance of a Q2 2019 RBA rate hike (about 70% priced into markets). Meanwhile in the US, the minutes from the May Fed policy meeting have been read dovishly, suggesting 2 more Fed hikes this year (Westpac’s base case) rather than 3. Prices of Australia’s key commodities were mixed last week but overall don’t undermine the Aussie as it outperforms on cross rates. If this remains the case and the capex data prints near expectations, AUD/USD should find support on any dips under 0.7500, but if EM stresses persist, rallies should be capped around 0.7630/40.”