Australian Dollar Down As US-China Tensions Escalate Over The Hong Kong Issue

Australian Dollar Down As US-China Tensions Escalate Over The Hong Kong Issue
May 28, 2020

 

The Aussie dollar fell sharply against the US dollar after the data pertaining to the construction done in the first-quarter indicated a contraction from the earlier quarter. The release of better-than-anticipated Richmond manufacturing index, suggesting a slight improvement in manufacturing conditions, also aided the US dollar’s uptrend. Notably, the Australian dollar’s steep fall was an outcome of rising tensions between the US and China over the Hong Kong issue.

The seasonal rise in Chinese corporate demand for dollars also offered huge momentum to the greenback’s rally. Furthermore, some investors are anticipating a quick rebound in the US economic activity. In the last 24 hours, the AUD/USD pair has lost over 100 pips to drop from a high of 0.6675 to a low of 0.6570.

The Australian Bureau of Statistics has stated that construction work done has contracted by 1% q-o-q in the first quarter, after shrinking by -2.9% in the earlier quarter. Economists had anticipated the construction work to contract by 1.5%.

According to the Federal Reserve Bank of Richmond, the manufacturing index improved to -27 in May, compared with -53 in the earlier month. Economists had anticipated an improvement in the index reading to -40. Notably, the composite index remained at the lowest level in 11 years.

As per the latest survey data from the Richmond Fed, Fifth District survey of manufacturing activity remained weak in May. Even though fresh orders, shipment, and employment were above their respective April readings, still, the figures indicated contraction. The index for the local business environment was also negative, but contacts anticipated situation to enhance in the forthcoming six months.

The US dollar, being a safe haven currency, also rallied on concerns over the likely response of the US to China’s intended security law for Hong Kong. US President Donald Trump has stated that the White House will give its response to the Hong Kong security bill before the end of this week. News reports indicate that Washington is considering sanctions on officials in China.

Additionally, the seasonal increase in demand for the greenback from the Chinese enterprises also spurred the US dollar. Furthermore, Chinese companies are afraid that the yuan will be allowed to decline further by the People’s Bank of China (PBoC). So, companies are buying US dollars to meet their import requirements.

As Australia is heavily dependent on China (generated 38% of total export revenue from China in 2019), the Aussie tends to fall on any negative news related to China. Additionally, the antipodean currency, a riskier asset, is usually sold off when market sentiment swings to risk-off mode.

Commenting on the current situation, currency analysts Thu Lan Nguyen at Commerzbank, said “Yesterday’s risk-on rally is already running out of steam. That seems quite right, but not just because of the tensions between the US and China.”

Nguyen opined that the economic outlook remains unclear as countries reopen their economies.

Junichi Ishikawa, a senior FX strategist at IG Securities in Tokyo, has pointed out that the US dollar will be in demand if tensions between the US and China sustain. “More problems between these two countries would slow the dollar’s recent decline and potentially lead to dollar buying as a safe haven.”

Technically, the AUD/USD pair has formed a double top pattern at 0.6675. The next support is anticipated only near 0.6450. Additionally, the currency pair is also trading below its 50-day moving average while the stochastic oscillator is also making new lows. Therefore, we are anticipating the currency pair to decline in the short-term.

AUD - technical analysis - 28th May 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world


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