Forex Market: AUD/USD extends losses due to Australia-China trade relation concerns

AUD/USD extended losses from the previous trading day on Tuesday, despite a rally in other risk-sensitive assets, as concerns emerged over worsening trade relations between Australia and China, its largest trading partner.

A report by S&P Global Platts, citing sources with knowledge of the situation, said that state-owned utilities and steel mills in China had received verbal notice from customs to discontinue imports of Australian thermal and coking coal immediately.

The report did not point out any concrete timeline for the ban on Australia’s coal. Still, according to the sources, imports of the commodity are expected to remain difficult until authorities from the two countries resolve their political frictions.

Australian Minister for Trade, Tourism and Investment Simon Birmingham on Tuesday attempted to play down signs of trade friction escalation, as he noted the media reports were being investigated.

“Despite the positive risk sentiment, the A$ appears to have been well contained by further indications that Chinese imports of metallurgical and thermal coal have been banned joining wheat, beef and wine to varying degrees,” Westpac currency strategist Robert Rennie said.

“This is important given that 22% of Australian thermal coal exports went to China in the last year and 28% of metallurgical coal. Prices have dropped sharply with the second Queensland met coal swap down $20 over the last week,” he said.

Overall risk sentiment was still supported by hopes Joe Biden will win the US presidential election next month and his administration will authorize a large fiscal stimulus package to stimulate the pandemic-ravaged economy.

As of 7:01 GMT on Tuesday AUD/USD was edging down 0.40% to trade at 0.7178, while extending a pullback from last Friday’s 2 1/2-week high of 0.7243. The major pair has edged up 0.24% so far in October, after retreating 2.91% in September, its first monthly loss since March.

In terms of macro data, today’s focus will be on US consumer price inflation report for September due out at 12:30 GMT.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled 0.7 basis points (0.007%) as of 6:15 GMT on Tuesday, up from -0.1 basis points on October 12th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7215
R1 – 0.7227
R2 – 0.7247
R3 – 0.7258
R4 – 0.7270

S1 – 0.7195
S2 – 0.7184
S3 – 0.7164
S4 – 0.7144