Australia is heavily reliant on China purchasing it’s exports as one of it's largest trading partners, and due to this the state of the Chinese economy influences the value of the Australian dollar.
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The US-China Trade war is causing a slowdown in Chinese growth which in turn is having an impact on the purchase of goods and services from Australia.
Donald Trump is due to meet Chinese President, Xi Jinping this week for crucial trade talks. The Australian dollar has enjoyed some significant gains against sterling of late, but this could change if Trump decides to proceed with further increases in tariffs.
Trump said in the Wall Street Journal he expects to move ahead with raising tariffs on $200bln in Chinese imports to 25% up from 10%. Trump stated it was “highly unlikely” he would accept China’s plea to hold off on the tariff increase due to come into place on 1st January.
There has been a rise in global protectionism which is not only bad for Australia, but also the Australian dollar.
If the tariff increase goes ahead expect Australian dollar weakness.
The Australian dollar is considered to be a risky currency amongst investors as it is a commodity based currency. It has fallen out of favour lately due to global economic uncertainty and investors are choosing the US dollar as the destination of choice due to its safe haven status and promise of high returns. That is why it is prudent to keep an eye on the Interest Rate outlook from the Federal Reserve. Fed Chair, Jerome Powell is due to speak later today and he could give an indication to any future change in rates.
The next data release of consequence will be the Reserve Bank of Australia (RBA) Interest Rate Decision. Personally I feel that current economic data would not support a hike and while the US/China trade war continues, I think the RBA will be cautious in any change in rates and they will remain on hold at 1.5%.
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