- AUD/USD is firmer on two counts, one being a weak US dollar and the second being continued expansion in Chinese economic data.
- However, there are souring relations between Beijing and Canberra which could undermine the otherwise promising outlook for AUD.
At the time of writing, AUD/USD is trading at 0.7387 and is higher by 0.29%. The pair has ranged between 0.7340 and 0.7403, marking the highest level since August 2018.
The US dollar is printing new two-year lows on the back of the fed cementing the lower for longer narrative on markets.
More on that here: US dollar testing bullish commitments at the 92 figure in the great unwind
While the US dollar is a huge factor to consider, so are the trade and political relations between Australia and China as Beijing tightens the screw on Australia’s trade dependency on the nation.
China’s economic comeback
Meanwhile, China’s official manufacturing Purchasing Manager’s Index (PMI) for the month of August came in at 51.0 as compared to 51.1 in July, according to the National Bureau of Statistics.
Analysts polled by Reuters had expected August PMI to come in at 51.2. However, the Composite reading was stronger due to growth in Services.
Services moved at a faster clip in August with the official Non-manufacturing PMI coming in at 55.2 as compared to 54.2 in July.
PMI readings above 50 indicate expansion which we have now seen in manufacturing activity and industrial output for the fifth straight month.
Markets are predicting further upside tin industrial activity as fiscal support will be stepped up in the coming months
The recovery in China is driven partly by government stimulus spurring infrastructure investment and resilient exports such as medical supplies shipments which have jumped in the first half of the year.
Canberra & Beijing relations lowest in years
For Australia, its relationship with China is not a happy one at the moment following Canberra’s push for answers on the pandemic’s origins which had angered Beijing earlier this year.
Additionally, Canberra had raised concerns about human rights in Xinjiang and Hong Kong, banned Chinese firm Huawei from building Australia’s 5G network, and debated allegations of Beijing interfering in domestic affairs.
In the latest round of retaliation, China has doubled down on the Australia trade dispute with a new joint probe into wine subsidies and dumping claims.
China’s Ministry of Commerce said it will initiate an investigation into wine subsidies after receiving a complaint from the Wine Industry Association of China
Prior to this, China announced an anti-dumping investigation looking at wines being sold in China at prices less than in Australia.
China has already imposed an 80% tariff on Australian barley, suspended some major Australian beef imports, warned students and tourists against travelling to the “racist” country and according to the BBC, had even sentenced an Australian man to death for drug smuggling.
AUD was under a little pressure yesterday on the fresh headlines. Like other liberal democracies, Australia is increasingly challenged by the need to balance its economic dependence on China and its own values and interests.
For the past decade, China has been Australia’s largest trading partner and now accounts for 32.6% of its exports.
But on the political level, there’s a consensus that Canberra-Beijing relations have sunk to their lowest ebb in decades. It has been three years since a bilateral meeting of leaders, despite Australia’s repeated requests.
However, while the Chinese Communist Party has ramped up the pressure on Australia, it has been careful to attack trade items it can secure elsewhere.
Iron ore is a hugely important import for China for its own domestic extraction is a sub-quality. Australia is its main source.
Whereas wine can be sourced from Europe, barley from the Americas, meat from almost anywhere, coal from Indonesia or Russia, what China can’t readily replace is Australian iron ore.
Iron ore has been a very crucial input to the value of the Aussie this year pertaining to the account surplus and income from exports to China as China desperately seeks to build its way out of the economic shutdown.
Between May and June alone, iron ore exports to China rose by 14 per cent. When combined with surging prices, Australia has seen total exports come in at more than $100 billion for the year.
RBA and GDP in focus
Meanwhile, the Reserve Bank of Australia will meet to announce monetary policy although there are not great outcomes to be expected.
The monetary stimulus that has already been deployed to assist the fiscal efforts against the pandemic shock is probably sufficient enough in the eyes of the central bankers.
While Victoria has been an upset for the economic recovery, there is still a lack of hard data to back any policy shift at this juncture.
However, markets will be on the lookout for any additionally downbeat comments which could negatively impact what might be regarded as a vulnerable AUD given the souring relations between Canberra and Beijing.
Speaking of data, another key event taking place this week, as soon as day after the RBA, comes with the nation’s second-quarter Gross Domestic Product.
If the data proves that the nation’s slump is less pronounced than other nations, then this could reignite the coronavirus recovery playbook for the currency, especially as the RBA is seen comfortable with it being at recent levels.
AUD/USD levels
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