According to Sean Callow, Research Analyst at Westpac, if trade tensions continue to dominate global headlines, then equities should remain vulnerable which is likely to undermine AUD.

Key Quotes

“This should still be clearer on cross rates than on AUD/USD, with US dollar sentiment still lukewarm. 0.76-0.77 should contain most trade on the week in this scenario.”

“AUD/USD printed 3 month lows in the mid-76 cent area just ahead of the Easter holidays but is only down about 1 cent over the past month. This disguises the Aussie’s dismal performance on cross rates in March. It fell against every G10 currency and every major Asian currency. This saw the A$ trade-weighted index (published by the RBA) fall to lows since June 2016. Of course, this depreciation will be welcomed by the RBA.”

“In terms of the drivers of AUD decline, after broad stability in February, Australia’s key commodity prices have rolled over in March, including an 18% fall in the spot iron ore price. At least some of the weakness in industrial commodities arguably stems from the switch in US policy focus from tax cuts to protectionist trade measures, which have been the main focus for FX markets in recent weeks.”

“AUD is a handy proxy for US-Asia trade tensions, given Australia’s export reliance on the region and the currency’s flexibility relative to Asia’s managed currencies. Two month lows on US equities to start this week added to the nervousness on the Aussie.”