The Australian Dollar (AUD) has rallied against the US Dollar (USD) in recent weeks, but has underperformed other G10 currencies.This is mostly a result of the RBA’s yield curve control policy and downwards pressure on yields.The ongoing trade war with China won’t help sentiment, especially given Australia’s latest move, but in actual fact exports to China have been rising despite restrictions.Markets are off to a relatively quiet start to the last week of April with slight gains in European stocks after a mixed session in Asia that saw China lower by around –1.5%. Currencies are flattish with only Sterling and the Australian Dollar making moves of any note. GBPUSD is +0.3% and AUDUSD is 0.5% while EURUSD is unchanged. Meanwhile, Bitcoin is getting some attention after making a 10% bounce from a low near $47k which was officially in bear market (-20%) territory from the April high.The week ahead is busy with data, US earnings from some of the Tech heavyweights and central bank meetings from the Fed and the BoJ. Many analysts expect the Fed to stay firmly put and for the US dollar downtrend to continue. Most of the central banks seem to be waiting for the Fed to lean hawkish before doing so themselves, but the BoC did go it alone last week by making some significant hawkish moves by tapering QE and signalling a rate hike in late 2022. If the Fed once more drags its feet this week, as broadly expected it will, then perhaps other banks will follow the BoC’s lead.AUD Under PressureOne bank unlikely to do anything soon is the RBA, primarily because the Australian Dollar has performed so well over the last year. However, there are signs its policies – particularly yield curve control – are finally having an effect on the AUD as it has started to underperform in the last month or so. AUDUNZD has fallen –1.7% from the March highs to find support at its 200dma around 1.065, while EURAUD is making higher lows on the monthly chart since February. AUDUSD is starting the week strong near 0.78 but is still some way below the 0.80 yearly high.And it’s not only the RBA policies weighing on the Ozzie. A low-key trade war is ongoing with China, all sparked by Australia’s insistence China should be more forthcoming with information on the origins of Covid-19. In recent months China has imposed import restrictions on a number of goods from Australia including coal, timber and red meat. Australia in-turn have restricted Chinese access to Australian financial markets and trade deals. Relations have soured further in recent days, as ING report:“The decision by the Australian government to scrap the Belt and Road Initiative (that would have allowed increased presence of Chinese companies in Victoria’s infrastructure projects) is another worrying signal that the diplomatic and trade relationships between the two countries are set to stay fragile. The main risk for AUD is that China retaliates in the coming days by hitting Australian exports again.”Yet, despite the fallout, The South China Morning Post said China’s imports from Australia rose by 20.9% to $US33.73 billion ($44.37 billion) in the first quarter. This was mostly driven by a demand for iron ore.“China’s iron ore imports from Australia surged in March as steel demand in the country’s construction and manufacturing sectors remained healthy amid continued recovery from last year’s slump,” reports the Financial Review.If China were to retaliate with iron ore restrictions, it could make a sizeable dent in the Australian economy. Demand has ensured this hasn’t yet happened, but with extra supply available from Brazil and slowing demand, the risk is growing.In the short-term, the Australian Dollar will be driven by Tuesday morning’s CPI reading, but attention will turn later in the week to Chinese PMIs and any backlash against the latest shot fired by Australia in the ongoing trade war.
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