The Australian and New Zealand Dollars are trading higher on Tuesday despite the potentially bearish news about additional tariffs from the United States on China. The counter-intuitive price action suggests the news had already been priced into the market since the idea had been floated around for over a week. The announcement on Monday allowed those who had shorted the Aussie and Kiwi ahead of time to book profits.
On Monday, President Trump said that he will impose 10 percent U.S. tariffs on about $200 billion worth of Chinese imports, effective September 24.
Trump also said that if China takes retaliatory action against U.S. farmers or industries, “we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”
Despite the threat from Trump, the focus will shift towards China’s response to the announcement. Most analysts expect China to attempt to disrupt the U.S. supply chain with components for technology devices an obvious target as well as raw materials used to make certain devices. Furthermore, the country may even announce the cancellation of trade talks.
In other news, the minutes from the RBA’s September 4 monetary policy meeting provided no surprise for traders so the upward response we are seeing is likely being fueled by short-covering. In its minutes, the RBA reiterated that “the next move in the cash rate would more likely be an increase than a decrease.” However, “there was no strong case for a near-term adjustment in monetary policy.”
The central bank also highlighted that a few major central banks, led by the U.S. Federal Reserve, were expected to continue raising rates to prevent inflation from overheating.
The RBA also said the prospect of additional Fed rate hikes is making the U.S. Dollar a more desirable investment and that “raised risks” for some, especially for “fragile emerging” markets. However, “the modest depreciation of the Australian Dollar was helpful for domestic economic growth.”
Finally, the Reserve Bank also noted that there were “still significant tensions around global trade policy” that represented a “material risk” to the global outlook.
The AUD/USD is currently in a position to test a key 50% level at .7224 and a main top at .7230. Taking out these levels is likely to trigger a few buy stops which could extend the currencies gains.
The NZD/USD is rapidly approaching a key retracement zone at .6614 to .6640. Trader reaction to this zone could determine the near-term direction of the Forex pair.
Since the major fundamentals are still bearish, all trend traders can do at this point is wait for the counter-trend short-covering rally to stop. We could be looking a “big boy” money trying to take out the weaker shorts in order to reach more favorable shorting levels.
Later today, investors will get the opportunity to react to minor reports in the U.S. including the NAHB Housing Market Index and TIC Long-Term Purchases although these reports are expected to have little impact on the trade.
The direction of U.S. Treasury yields ahead of next week’s widely expected Fed rate hike is also expected to influence the price action.
This article was originally posted on FX Empire
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