AUD/USD: Choppy range trading near-term with downside bias later - Rabobank

Analysts from Rabobank, consider that if China’s growth slows because of a trade war with the US, the Australian economy and the AUD would be vulnerable. 

Key Quotes: 

“A trade war between the US and China has the potential to put Australia in a difficult position. China is Australia’s biggest trade partner, but the US is its largest source of investment. Given the existence of a current account deficit registering 2.2% of GDP, the AUD could prove to be sensitive to any change in investment intentions.”

“We would expect a step up in US/China trade tensions to introduce downside risk to AUD/USD. This week the market’s worries about an imminent trade war have swung wildly. Reassurances from White House Economic Advisor Kudlow that “there’s at least two months before any actions are taken” encouraged the view that some of the threat of the Trump Administration could be a negotiating tactic designed to push China into making concessions. The reality, however, is that it is impossible to come to any hard conclusion at this stage as to how far a trade war could extend and what steps President Trump will take to promote its America First policy.”

“We see more downside than upside risks for the Australian economy on a worsening of US/Chinese trade talks, if a tangible threat to Chinese growth arises. On the margin, this underpins our view that RBA policy will remain on hold through the reminder of the year. Following its push higher in December and January, AUD/USD has moved lower as expectations of higher RBA rates have retreated. We see risk of choppy range trading near-term with a downside bias towards 0.75 later in the year. A step up in trade tension would bias these forecasts lower.”