The US wants to isolate China, and Australia is faced with a challenging decision: to maintain the status quo and pay tariffs or risk losing its primary market. Let’s discuss this topic and make a trading plan for the AUDUSD pair.
The article covers the following subjects:
Major Takeaways
- A trade war with the US will slow down GDP in China and Australia.
- The Reserve Bank of Australia may cut the rate by 50 bps.
- Parliamentary elections are not a risk factor for the aussie.
- The AUDUSD pair can be purchased on pullbacks with targets at 0.648 and 0.656.
Weekly Fundamental Forecast for Australian Dollar
Australia finds itself in the midst of the US-China trade war, yet the Australian dollar has proven to be resilient. The AUDUSD quotes managed to surge by nearly 8% from April lows, though the economic downturn of the main trading partner, due to the 145% tariffs, casts a shadow over the Australian economy. In today’s economic climate, it is evident that many consider the greenback a toxic currency.
The US dollar is an underdog among the G10 currencies due to the significant sell-off of US assets, and carry traders leverage this opportunity. The effectiveness of carry trade strategies using the US dollar as a funding currency, with the subsequent purchase of currencies from developing countries, has reached its peak since May 2018. Currencies of Eastern Europe and Latin America are of particular interest.
Carry Trade Efficiency
Source: Bloomberg.
AUDUSD bears appear to be the primary victims, but bullish momentum is gradually losing steam. The deal between the US and China is likely to take a considerable amount of time, which is causing concern for Australia. The 145% tariffs appear excessive to Donald Trump, but even reducing them to 50-65% would be an insurmountable burden for export-oriented China. Prior to the first trade war, the country’s economy was expanding at a rate of 7%. However, in 2024, its GDP growth rate slowed to 5%, and the IMF anticipates a further reduction to 4%.
A key point to note is the US’s strategic intent to isolate China during trade negotiations with other countries. Beijing has issued a warning of potential retaliation. If international trade becomes a competitive environment where the strong exploit the weak, it will ultimately lead to adverse outcomes for all parties involved. Australia’s current circumstances are of grave concern. China is the primary market for its goods and commodities, and the US is its primary military partner. The previous instance of Canberra’s attempts to maintain a dual-sided stance led to a noticeable deterioration in diplomatic relations with China.
Major Central Banks’ Interest Rates
Source: Bloomberg.
Expectations of a cash rate cut by the RBA at the May meeting could put pressure on the AUDUSD exchange rate. In April, the Australian regulator reported that additional data would be available to inform decisions by the next meeting. The derivatives market anticipates a 75-basis-point reduction in the key rate by the end of the year, with a possibility of a 50-basis-point decline in May. Notably, the futures market also expects three acts of monetary expansion from the US Federal Reserve.
The upcoming May parliamentary elections have not caused concern for the Australian currency. The ruling Labor Party currently holds a higher rating, but according to Goldman Sachs, even if the Liberals assume power, their policy is expected to be more stimulating.
Weekly AUDUSD Trading Plan
The US administration’s reluctance to deviate from its strategy of equalizing the US trade balance is likely to exert sustained pressure on the US dollar. Against this backdrop, the AUDUSD pair is likely to continue maintaining its bullish trend, allowing traders to open long positions on pullbacks with targets of 0.648 and 0.656.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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