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

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. 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. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67.6% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. 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. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.