Trade Tariffs and Exposure to China Could Lead Aussie Lower.

Trade Tariffs and Exposure to China Could Lead Aussie Lower.

Traders looking for opportunities based on the intense news flow surrounding tariffs on Chinese goods need look no further than the AUDUSD pair.

Getty Images

Asian markets were rocked last night by the news the US President was releasing details on a new round of tarrifs to levy against China. The total amount of goods to be impacted could be as high as 200 million. 

Market sentiment seems to be shifting from a cautious "wait and see" response to a feeling that "this gets worse before it gets better".

With changes of this magnitude, there certainly could be cascading effects beyond China as the ripples of a less globalized world begin to be quantified, if not outright felt yet.

The Australian currency, and specifically the AUDUSD pair, has long been a proxy for China's economy. The two coutnries are closely linked economically. Australia is a well developed commoditeis powerhouse, and their metals and other raw goods are widely consumed across China's economic engine. 

With a downturn in Chinese growth, the speculation is that could weigh heavily on the Aussie, and the Australian economy as a whole. 

The Chinese Yuan and AUDUSD pair have long enjoyed a correlated relationship, and our models have shown the correlation growing recently. The linear model below shows how they have moved in tandem, and reveals that as much as 67% of the movement in AUDUSD can be explained by movement in the Yuan.

 

model and visual by Jason Pfaff

 

Traders should remain mindful, the shifting trade environment is still mostly "noise", as only very minimal changes have taken effect. However, it has almost all been been negative, sentiment has soured, and for this week at least, the noise has been deafening.

 

Outlook for AUDUSD

 

Over the medium to long term, we see interest rate differentials continuing to weigh as well. The United States has telegraphed a desire to continue on a path of 2 more rate hikes this year, and 2-3 next year. When a central bank hikes rates, it is typically thought of as supportive or constructive for a currency.

On the other side of the pair, the Royal Bank of Australia shows no signs of hiking rates any time soon. With the US hiking more this year, that could produce as much as a 50 basis point differential between the 10 year Treasuries offered by the two countries. Through 2018, this should produce a longer term downtrend in AUDUSD.

On the shorter term, the trade related noise and a weakening Chinese Yuan should continue to act as resistance against any upside in this pair. The Yuan has moved over 7% in the last 150 days on a steep move lower and is now nearing lows for the year. The chart below shows the recent move which follows a major move up through the first part of the year.

 

chart built by Jason Pfaff in TradingView

This morning, support for the AUDUSD is holding around .7400, with resistance at .7440. Any breech below .7400 today on a move of conviction, could bring this pair closer to .7330 by the end of the week.

 

chart built by Jason Pfaff in TradingView

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility. Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

Trading can be volatile and investors risk losing their investment on any given transaction. However, the design of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.