The Australian Dollar (AUD) has been under pressure, facing challenges in the face of rising market volatility and escalating trade tensions between the United States and China. The ongoing trade war has significantly impacted global markets, leading to increased risk aversion among investors. The CME FedWatch Tool currently projects an 86% probability that the Federal Reserve will keep interest rates unchanged at its March meeting, adding to the uncertainty surrounding the financial landscape.
At the center of these tensions is China's recent decision to impose tariffs on key American exports. The Chinese Commerce Ministry has announced a 15% tariff on US coal and liquefied natural gas (LNG) imports, alongside an additional 10% tariff on crude oil, farm equipment, and certain automobiles. These measures are part of a broader strategy by China to counterbalance US economic policies, further straining relations between the two economic powerhouses.
Despite these challenges, the Reserve Bank of Australia (RBA) has maintained its Official Cash Rate (OCR) at 4.35% since November 2023. This decision reflects a cautious approach by the RBA, as it navigates an uncertain economic environment. Meanwhile, Australia's Judo Bank Composite Purchasing Managers Index (PMI) climbed from 50.2 in December to 51.1 in January, indicating modest growth in private sector activity.
However, the Australian Dollar has struggled against major currencies, notably weakening against the Japanese Yen. The AUD has also edged lower against the US Dollar (USD), as heightened fears over US-China trade tensions have increased risk aversion. The AUD/USD pair has failed to gain traction despite an improved PMI reading released on Wednesday.
China remains Australia's largest trading partner, with iron ore being the country's most significant export. In 2021, iron ore accounted for $118 billion in exports, with China as its primary destination. The health of the Chinese economy is a critical factor influencing the value of the Australian Dollar. Any disruptions in China's economic activities can have a profound impact on Australia's trade balance and currency valuation.
The RBA has tools at its disposal to influence credit conditions through quantitative easing and tightening. Quantitative easing is considered AUD-negative, while tightening is AUD-positive. These measures can affect the currency's performance in the global markets.
The Trade Balance, which represents the difference between a country's earnings from exports and its payments for imports, plays a crucial role in determining the value of the AUD. A positive net Trade Balance strengthens the AUD, whereas a negative balance can weaken it.
Meanwhile, the US Dollar Index (DXY) remains under downward pressure for the third consecutive day, trading around 108.00. This trend reflects broader concerns in the global economy, as investors navigate a complex landscape marked by geopolitical tensions and economic uncertainties.