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AUD May Fall on Australia-China Tensions, Euro Eyes €500b Proposal

Australian Dollar, Euro, Australia-China Tension, EUR/AUD Analysis – TALKING POINTS

  • AUD at risk as Australia-China relations deteriorate, Beijing strikes with economic arsenal
  • Euro will be closely watching progress on 500b recovery fund as North-South divide persists
  • EUR/AUD outlook bearish as pair hovers near-three year low with layers of resistance on top

AUD Tenses up as Australia-China Relations Deteriorate

The Australian Dollar may face higher-than-usual selling pressure in the week ahead as economic data continues to underline the impact of the coronavirus pandemic. As a major commodity exporter, shifts in sentiment frequently impact the cycle-sensitive AUD. In addition to an unfavorable global backdrop, the export-oriented country is now experiencing growing tension with China – its largest trading partner.

AustraliaTotal Trade With Top 10 Partners (2018 Figures)

AUD May Fall on Australia-China Tensions, Euro Eyes €500b Proposal

This week, Prime Minister Scott Morrison will be giving a speech at the National Press Club where he is expected to discuss the state of the economy as the government eases lockdown orders. However, the topic investors will be most eagerly tuning in for will be commentary on the current state of Australia-Sino relations.

Amid the spread of Covid-19, Australia has called for an investigation along with other members of the international community into Beijing’s handling of the pandemic. However, unlike other countries, Australia does not have the luxury of being able to critique its largest trading partner without severe, wide-ranging implications.

In response to commentary by Australian officials, China banned the importation of meat from four key slaughterhouses and imposed tariffs on other products, like barley. The Ambassador to China even suggested recently that Chinese tourists and students may decide to boycott Australia, further dampening economic activity in an already-unstable environment.

Beijing is reportedly considering targeting more Australian exports including dairy, wine, seafood and fruit. Actions may include not only tariffs, but also stricter quality checks and custom delays. China has denied any relationship between criticism of its handling of the pandemic and these measures.

Australia has managed to avoid slipping into a recession for 30 years – even dodging the 2009 global downturn – but this time it may not be so lucky. The China-dependent economy only just recently was offered some respite from the US-China trade war, but now it may have a direct economic conflict with Beijing. An escalation there could further deepen Australia’s economic slowdown and subsequently hammer AUD.

Euro Eyeing Key Policy Announcements

The Institute of International Finance will be doing a live stream of the IFF European Conference titled: “The EU, Covid-19 and the Future of Financial Services” this week. ECB Chief Economist Philip Lane will be among the speakers whose commentary could elicit volatility in the Euro. On the same day, the European Central Bank will also be publishing its Financial Stability Review.

While key headlines from the latter report may not necessarily elicit notable volatility, the content of the publication could contain key trends in the financial sector and how they may affect the stability in the region. From the standpoint of employing a macro-fundamental trading strategy, this report may be a key document to monitor.

The European Commission is also scheduled to release a proposal for a recovery fund as a way to lessen the severity of the coronavirus impact. France and Germany – rather unexpectedly – recently put forward a 500 billion euro grant proposal that would distribute capital to countries and sectors hit hardest by Covid-19. The news helped bring down Italian bond yields that were rising amid growing doubt about the country’s ability to service its debt.

Euro Rallied, Italian 10-Year Bond Yields Fell After Recovery Fund Breaks Headlines

Chart showing Euro

The unifying move also helped push the politically-sensitive Euro higher. However, the rift between North and South will likely make negotiations difficult, and a prolonged period of deliberation could introduce uncertainty and undermine the Euro. Mediterranean states rejoiced at the prospect of greater fiscal unification, though their comparatively-more frugal Northern neighbors were displeased. It is this kind of friction that may damage the Euro.

EUR/AUD Technical Outlook

EUR/AUD is dangerously close to retesting the July 2017 uptrend as it trades just above familiar support at 1.6590 (gold-dotted line). If the pair is unable to break the floor, it may then seek to challenge a multi-layered ceiling with the first obstacle at 1.7115 (purple-dotted line).

EUR/AUD Technical Analysis

Chart showing EUR/AUD

EUR/AUD chart created using TradingView

From a technical perspective, EUR/AUD has a several of shelves to clear before it is able to reach a key swing-high at 1.8856, but only one layer of support between it and an almost three-year uptrend. Breaking below that could mark a tectonic shift in the pair’s trajectory.

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter