AUD was under pressure during the overnight session on the news that China has imposed an import ban on four Australian abattoirs, reported Australian news agency ABC.
AUDUSD dropped from above 0.6480 to below 0.6440 on the news over the course of around 20 minutes, before gradually recovering this morning.
China’s blacklisting of the Australian red meat abattoirs, three in Queensland and one in NSW, comes just days after China flagged plans to introduce an 80% tariff on Australian barley.
One analyst has told the ABC the four meatworks represent 35% of beef exports to China, a trade that had been on track to reach $3.5 billion this year. In other words, over $1bln in Australian annual exports has been, for now, paused.
Many analysts are seeing the move by China as a way of punishing Australian PM Morrison, who continues to demand an independent investigation into the origins of the Covid-19 pandemic in China.
However, somewhat easing concerns that this might be the start of some kind of Australian/Chinese trade war, Australian Trade Minister Birmingham said that he believed the meat exporters to be in breach of technical rules in China, and said the issue is not linked to the Covid-19 inquiry. China’s Foreign Ministry this morning echoed this sentiment.
Morrison Demanding Independent Covid-19 Inquiry
The Australian Government has been proposing an independent inquiry into the Covid-19 outbreak, something which has angered China greatly (likely because it would expose incompetence/corruption within the Chinese communist party).
Prime Minister Scott Morrison has reportedly pushed the idea in conversations with US President Trump, German Chancellor Merkel and French President Macron. The Australian PM reportedly intends to build an international coalition in support of such an inquiry, which would have two aims;
One, to better understand the origin and spread of the pandemic, and two, to force change in the World Health Organization (WHO) which the Australian Government claims was “tardy and ineffectual” in the early days of the outbreak.
AUD at risk?
Given that China is Australia’s largest export partner, a serious trade bust-up between these two would be devastating for the Australian economy and, as such, present a big downside risk to AUD.
Though I think it is unlikely that a serious bust-up will occur on the Australian/Chinese trade front, AUD appears not to be adequate pricing in this risk. AUDUSD is still trading just off recent highs at just beneath the 0.65 level.
Much of the rally from 0.55 March lows has been driven by a global improvement in sentiment, combined with the fact that Australia’s Covid-19 outbreak is widely seen as less severe than in other nations, meaning the economic recovery is likely to be swifter.
But as US/China trade tensions flare up (US President Trump last night again talked about how he was not happy with China), the risk of an Australia/China trade flare-up is growing…
This is definitely going to be a theme worth watching going forward.
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