AUD/USD Analysis: Eyes on China and the yuan Amid Trump’s 104% Tariff

All eyes are on how China responds to Trump’s 104% tariff. With the numbers already becoming meaningless, the Australian dollar could get dragged a lot lower with a yuan devaluation, with AUD/CHF leading the bearish stampede amid Swiss franc strength.

Any hopes of a ‘Turnaround Tuesday’ were dashed when President Trump announced a 104% tariff on Chinese goods, citing China’s failure to remove its 34% retaliatory tariff on US exports. The triple-digit levy is set to take effect from midnight Wednesday, alongside new tariffs of up to 50% on goods from all other countries. The administration has shifted focus to continued negotiations with other trading partners. All eyes are now on China, which on Tuesday vowed to “fight to the end.” Their response today will be telling.

Assuming China skips the pointless route of throwing large numbers back at the US, they could go straight to currency devaluation.

View related analysis:

All eyes on China’s yuan fix today

Traders are already betting on a devaluation of China’s currency by shorting the offshore yuan (CNH), pushing USD/CNH up 1.2% to a record high on Tuesday. USD/CNH shares a tight correlation with AUD/USD, which has now slipped further into the 50–60 cent range—a level typically associated with financial and economic crises.

Put simply, a sustained move higher in USD/CNY spells trouble for the Australian dollar and the RBA. It effectively imports inflation—the very thing the RBA has been trying to contain post-COVID. The central bank may soon face a tough choice: intervene to support the currency, or risk worsening inflation by cutting rates to support growth.

Australian dollar analysis: A bearish cash cow?

AUD/USD is testing Monday’s low and sits just a day’s range away from 59c (by recent standards), with the 2020 weekly close low (~58c) looking increasingly attractive to bears.
EUR/AUD is probing Monday’s high, on the verge of setting a fresh 5-year high, with 1.59 now firmly in focus for euro bulls.
AUD/NZD continues to buckle under its own weight, with AUD/USD leading the move lower in the commodity FX space compared to NZD/USD and CAD/USD. 1.06 anyone?
AUD/JPY is continuing toward my 82 target, which could prove conservative if yuan depreciation deepens in the coming weeks.
AUD/CHF has hit a fresh record low, with the Swiss franc remaining the go-to safety play amid Trump’s escalating trade war.
AUD/CAD sliced through my bearish 87 target with ease and now trades at a 5-year low, as the Australian dollar feels more heat from a weakening yuan than the Canadian dollar has from Trump’s tariffs. It clings to the April 2020 low, which seems like a pivotal level over the near term.

Implied volatility is elevated

Perhaps not too surprisingly, the 1-day implied volatility band has more than doubled for AUD/USD and the closely intertwined NZD/USD. This provides a potential move of 52 pips in either direction (104 total) spanning the 0.5899 – 0.6603 area. Note that the Swiss franc is also expected to have higher levels of volatility, with the 1-day IV for USD/CHF rising to 241% of its 20-day average (52 pips up or down, or 104 total).

Economic events in focus (AEDT)

11:15 – PBOC announces the yuan fix
11:30 – Australian building approvals
12:00 – RBNZ interest rate decision
15:00 – Japanese household confidence
16:00 – Japanese machine tool orders
02:30 – FOMC member Barkin speaks
03:00 – US 10-year treasury auction
04:00 – FOMC meeting minutes

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

FOREX.com is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment and CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.forex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.forex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 42.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.

Delayed London Stock Exchange (LSE) Data

The London Stock Exchange (LSE) market data displayed or referenced on this website is provided on a delayed basis and is not in real time. The delay period may vary but is typically at least 15 minutes. This data is intended for information purposes only and should not be relied upon for trading, investment, or other financial decisions. We do not guarantee the completeness, reliability, or suitability of the data for any particular purpose. Users should consult real-time data sources and obtain professional advice before making any financial decisions.