Even before the US Commerce Department imposed a new set of tariffs on its largest export and import commodities, the Australian dollar had already weakened due to political and economic uncertainty within China. Now that the risk of additional protectionist measures has surfaced, the currency may very well continue to weaken against the US dollar, and it is possible for the AUD/USD to fall even further.
The Australian dollar has been one of the most stable currencies over the past several years, primarily due to increased trading between Australia and China. There are some indicators that suggest a slowdown in trading between China and Australia, and this could also contribute to weaker-than-average trade and capital flows. One must keep in mind that every time there is a slowdown in trade between two countries, there is the potential for the exchange rate to weaken in either direction.
Because of increased pressure on the renminbi trade, the US dollar has already strengthened against major world currencies including the Australian dollar. It is possible that the currency may continue to strengthen even more as it becomes increasingly apparent that trade policy will have significant repercussions. This could further complicate matters and could also lead to unexpected global market shifts.
But the risks of even more protectionist measures are higher than ever before. Although the US seems determined to use its bully pulpit to bolster its trade position and defend its economic interests in the world marketplace, this strategy may simply provoke the Chinese to press their advantage even harder. As such, if the US Administration moves forward with tariffs and retaliatory measures, it is possible that the AUD/USD may fall even further against the US dollar.
The Australian dollar may be losing some of its market strength as investors realize that the country has a complicated economic situation to deal with. The uncertainty that has arisen within China since its political and economic leaders took power has led to a drastic depreciation of the Yuan. Many of the sudden and unexpected moves by the Chinese government in recent months have caused a great deal of instability in the foreign exchange market, and this has prompted a large number of Australian investors to consider other alternatives.
Even if the Australian dollar increases in value, investors will likely need to take more precautionary measures to avoid being caught in the middle of a trade war. There are several factors that would result in a major appreciation of the Australian dollar, and the impact could be felt even more clearly if the US administration uses its economic and political power to directly confront the Chinese government. Just like with many countries that trade heavily with China, the Australian government will find itself under intense scrutiny, and this could further influence investors in the currency markets.
As the economy continues to deteriorate, investors in Australia may feel even more compelled to buy when the Australian dollar strengthens, but they will need to be mindful of the implications of the current economic situation. There are several short-term risks that could impact the AUD/USD, including an increase in oil prices and a weaker-than-average Canadian dollar.
While the current economic climate may be difficult, the AUD/USD is likely to continue to weaken. Although the currency has been somewhat resilient during the past several months, the growing political and economic uncertainty in China is going to ultimately lead to the weakening of the Australian dollar. At this point, it is very important for investors to act quickly to avoid the need to hold their money in the exchange markets for an extended period of time.
The biggest driver of the AUD/USD is likely to be consumer sentiment and consumer confidence. Both factors are likely to be influenced by the domestic political situation in China, which is currently being shaped by the increasingly-irritating micro-managerial-style leadership. of the Chinese Communist Party.
While the Australian dollar has historically strengthened against major world currencies including the US dollar, these factors will eventually cause the AUD/USD to weaken if the current economic situation is not resolved in time. One must also keep in mind that as the Australian dollar strengthens, this could cause further headaches for the Australian economy and government.