Australian Dollar US Dollar (AUD/USD) Exchange Rate Slumps as China Warns the US of ‘Negative Consequences’
The Australian Dollar US Dollar (AUD/USD) exchange rate slumped on Wednesday, leaving the pairing trading at around $0.6811.
Lack of clarity on US-China trade negotiations weighed on the risk-sensitive ‘Aussie’ while providing the safe-haven Dollar with a boost.
Reports stating that trade talks were getting down to the final stages were offset by rising tensions in Hong Kong.
The approval of bills to protect human rights in Hong Kong by the US Senate increased tensions in Beijing.
In response, China’s foreign ministry spokesperson called it a blatant interference and the US faced ‘negative consequences’.
Although many believe a preliminary ‘phase one’ deal will be reached before the end of the year.
Commenting on this, RBC Capital Markets’ chief currency strategist Adam Cole said:
‘The prospect of a broader more all-encompassing deal will drag on well into next year.
‘The market is worrying [about] this sort of exogenous shock to the process by the build-up of tension in Hong Kong – I ultimately doubt that either side will allow that to delay the process.’
President Trump Warns of Further Tariffs
Those familiar with US-China talks have said the ‘phase one’ deal could morph into something bigger if President Trump agrees to Beijing’s demands to roll back tariffs.
Earlier this month China said removing tariffs was an important condition to any deal, although the President has stated this action needs China to offer further concessions.
Added to this, US President Donald Trump warned there would be more tariffs if talks collapsed which weighed on risk appetite and stated:
‘[China] is going to have to make a deal that I like. If they don’t, that’s it.’
This left the Australian Dollar under pressure while providing the safe-haven US Dollar with support as Trump maintained his ‘tough on China’ approach.
Commenting on this, Westpac FX analyst, Imre Spiezer said:
‘It’s a very slightly risk-averse day. There’s a slightly cautious tone and mixed messages from the trade war negotiations.’
Australian Dollar (AUD) Slides on RBA’s ‘Dovish Tilt’
Meanwhile, on Tuesday the Reserve Bank of Australia (RBA) released its minutes from November’s monetary policy meeting.
The minutes showed policymakers had considered a rate cut and said the bank ‘agreed a case could be made’ for cutting rates.
Policymakers considered weak inflation and disappointing wage growth were grounds for a cut.
The ‘Aussie’ slumped against USD as the dovish minutes showed the move to cut rates was a close call.
Commenting on this, Gareth Aird, CBA economist said:
‘It appears that the ‘on hold’ decision was not made lightly.
‘We view this new information and its inclusion in today’s minutes as a dovish tilt. The small fall in the Australian dollar at 11.30am today implies that market sentiment agrees that this is a dovish development.’
Australian Dollar US Dollar Outlook: Will USD Extend Gains?
Looking ahead to this evening, the US Dollar (USD) could extend its gains against the Australian Dollar (AUD) following the Federal Reserve’s meeting minutes.
If the Federal Open Market Committee (FOMC) minutes reveal the Fed is more hawkish than expected, the ‘Greenback’ could rally.
Meanwhile, the ‘Aussie’ could be left under pressure following the release of CommBank’s flash PMI data.
If data reveals the manufacturing and services sector both fall below the no-change 50 mark into contraction, it is likely the Australian Dollar US Dollar (AUD/USD) exchange rate will suffer further losses.