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AUD falters as trade tensions with China escalate

AUD - Australian Dollar

The Australian dollar enjoyed a roller coaster like run through trade on Tuesday, bouncing between intraday day highs at 0.6535 and session lows at 0.6430. Reports of escalating trade tensions between Australia and China continued as China appears to have banned the export of meat from four large scale Australian abattoirs, a move that comes on the back of suggestions they will impose an 80% tariff on Australian Barley under claims Australian exporters had deliberately lowered prices to undercut local growers. Fears of a trade tiff with our biggest trading partner has added to the heightened sense of uncertainty currently plaguing markets, forcing the AUD lower while weighing on any upturn toward resistance in the short term. Having touched intraday lows at 0.6430 the AUD rebounded recouping the losses suffered through the domestic session as investors looked to correct USD positions ahead of today's speech from Fed Chair Jerome Powell. Investors have recently entertained the likelihood of negative US interest rates and with the Fed staunchly against such measures in the past Powell’s commentary will offer invaluable insight into any shift in Fed and FOMC thinking. Touching highs at 0.6535 the AUD has shifted lower into this morning’s open and currently buys 0.6475 US cents.

Attentions today turn to the Quarterly wage price index and Westpac consumer sentiment. We expect a steep decline in consumer sentiment while the wage price index will likely offer little to influence direction given it provides a backward look at Q1 and will offer little insight into the impacts of COVID-19 on earnings power. Instead, Powell’s commentary and risk demand will steer direction through midweek trade.

Key Movers

The US dollar fell through trade on Tuesday as investors square positions ahead of commentary from Fed President Jerome Powell and a slew of softer macroeconomic data sets. The DXY index fell back below 100 after consumer prices, a gauge of inflationary pressures, fell almost 1 % in April, the largest single month decline sine December 2008. The dip marks the second consecutive depreciation and highlights the scale of economic impact that has accompanied the COVID-19 health crisis. With the number of new cases still rising rapidly in the US the economies' ability to roll out of this pandemic and bounce back quickly is shrinking by the day weighing on policy expectations and long run USD pricing.

The Euro edged higher on the day but remains under pressure following last weeks German court ruling. While the ECB has defended its bond buying program, rejecting the court decision, suggesting it could be illegal under EU regulations the decision still throws the long term viability of the combined unit into question. If national courts can reject EU law then the project is essentially doomed. Having edged back toward 1.0850 we anticipate the currency will face further headwinds as it battles the virus and its devastating economic impacts with a move toward 1.06 a real possibility in the months ahead.

Expected Ranges

AUD/USD: 0.6380 - 0.6570 ▼

AUD/EUR: 0.5920 - 0.6050 ▼

GBP/AUD: 1.8620 - 1.9130 ▼

AUD/NZD: 1.0580 - 1.0720 ▲

AUD/CAD: 0.9020 - 0.9150 ▲