Anthony Cheung analyzes the Australian dollar as a proxy for US-China tensions. He expects a technical break toward 74 if the AUD follows the New Zealand dollar's recent pattern, with China potentially retaliating against Australia through trade restrictions like coal bans. COVID resurgence could further weaken demand for Australian commodities.
Chapters
So just coming up to 10 o'clock then, 24th of March, um, 2021. And I was just going to have a quick comment on the Aussie dollar, and it's something I'm watching which I wanted to comment on because there's a few things going on on a broader top-level geopolitical level, namely that of US and China. Which I'll go into explanation of in a moment. But the key theme being is that Kiwi dollar and Aussie dollar are trading in a very similar pattern of late. Understandably so, the Antipodean currencies do tend to mimic each other to a certain degree over that region. Now, before I look at the Aussie and go into that in detail, the interesting thing about the Aussie here is that this is looking at a daily continuation, and that market has held on its 100 DMA, which was the previous Feb lows. So it's held up at a key level of technical relevance. The Kiwi has broken that level. Now, the Kiwi was set up in exactly the same way. You got the round handle, you got 71, you got the March, Feb lows, year-to-date lows, and in that pair. And then you had that news come out just in the last 48 hours where they're looking to tackle the ongoing housing crisis in New Zealand. And that was the news catalyst for weakness in their domestic currency. And that was a trigger point which has led to a decent move lower, over a full point now in that last day or so. And actually, technically, if you look at it, we closed yesterday below, in the Kiwi, the November-December lows, and that being the round figure of 70. So I think technically that's quite interesting, still has a fairly bearish setup there. But the Kiwi is almost, for me, a litmus test of what we could see here. Now for here then, the straw that broke the Kiwi back was a news catalyst on the housing market earlier this week. For the Kiwi, what could that— for the Aussie, what could the news catalyst be? Because I think if we get a break here, I think we get a further extension of that price decline and perhaps targeting lower levels. 74, a decent near 2-point move could be on the cards over a multiple-day situation amid the dollar strength we're seeing. So you get into a spread. Right, that's good. So before we get to that, the main thing then I'm watching for— and Tim, then you could talk maybe a little bit about this— is that there's this ongoing friction at the moment between US and China. Now, as I discussed in the briefing, that friction is leading to then hostilities increasing on the Korean Peninsula. Now, historically, through episode of 2018-19, when Trump, before he broke the peace agreement with North Korea, what was happening was an increased intensification of ballistic missile testing coming out of North Korea. Now, what tended to happen there was that North Korea is an issue that really is quite unsolvable for the US because they cannot militarily intervene in that region without causing an immediate reaction from China. So what do they need to do? The US need to work and lean on China to control then the peninsula situation. It's very important then for strategic relationships within a very contested region because the US has important allies in Japan and South Korea, of which they have then paralleled military bases situated with these nations. So it's very important there for their military geographically to have a home, a base there. And so that's why those relationships are quite key. Now what's happening here is we had the first level, top level Alaskan meeting between first-time Biden's administration and Xi's team. As we know, that had a pretty frosty reception to kick things off. Now the thing that I'm watching here, and the reason why I'm looking at the Kiwi as a potential example, the catalyst here could be a retaliatory effect through the proxy of Australia that China could penalize the Aussies through what's called the Quad. I don't know if you've heard about the Quad. The Quad is the new group now that Biden has formed with basically Japan, India, and Australia. So US, Japan, India, and Australia are now called the Quad. And the Quad have a, a unity formed on the basis of anti-China, basically, or protectionism against China. Now, this is problematic for Australia, obviously, because Australia is almost entirely dependent on exportation of raw materials to China. And China then could play out then and express in a proxy against the US further penalizing Australia on, say, coal imports or things of that matter. Which they've already done multiple times in recent months and years. And so one thing I'm looking out for here is North Korea ramping it up. What you can have then is when you're having these ongoing negotiations, you can then have this kind of— kind of leveraged position where you know what the US want, and then you can say, okay, you've just got a stronger hand to play now if you're the Chinese. So Here then, I'd say there's a probability of a moderate outlook that Australia could get hit with some kind of Chinese retaliatory measure, and that could be the straw that breaks that Aussie. And what we saw with the Kiwi was we're at a key strategic technical level. A break means we spill over and we start to fall quite quickly in the Aussie under those conditions. And then, you know, if COVID gets worse, that's fine. China is a manufacturer exporter, but if the world declines, the customer declines, well, the activity needs to decelerate a little bit short term if we do get a COVID wave. And so that in itself is already going to impede, let's say, short-term demand for a lot of those material base materials out of Aussie. You throw this in the mix, um, short term, it could be a key catalyst to look for.
