The trade war draws in new parties while the trend toward manufacturing independence gradually gains traction. This time, Australian exports of coal to China have caught market attention. Soured relations between the two countries can lead to China to putting more emphasis on its domestic coal production and create more barriers to imports, thereby reducing the size of key market for Australian coal.
Earlier, China imposed duties on beef and barley from Australia because the latter called for an independent investigation of origins of the coronavirus. Now the market is digesting the rumors that China Development and Reform Commission (the main planning authority) has ordered state-owned companies in the utilities sector to halt purchases of thermal coal from Australia. It is critical to understand now how much Australia’s coal exports will suffer in quantitative terms and how long it will continue if rumors turn out to be more than just rumors.
Coal exports for heating from Australia plummeted by 41% in the week ending May 24 compared to last week, FT reports referring to data from the transport broker Thurlestone Shipping.
23% of Australia’s coal exports accounted for China (data as of March 2020):
Rumors of a trade war with China pose a risk of weakening AUD. If China really restricts coal imports from Australia, this gives reason to expect that iron ore, the largest commodity export item in Australia, could also fall under the threat of losing key market. The headwinds for the export of iron ore will create a more tangible blow to the Australian economy. Now the risk of such a scenario gives rise to opportunity for AUD to lag behind its “commodity peers”, for example, CAD.
Let’s examine possible technical setup for AUDCAD:
Considering the technical picture of AUDCAD on the daily timeframe, we can see that the pair has been in a state of decline since the end of November 2016. Despite some subjectivity, the indicated trend line touches four price extremes formed in the downtrend. We can also see that the pair touched several times the level of 0.91500, which has established itself as a solid support level. The drop below this level in September last year was held with a relatively small objection from buyers, after which the level was re-affirmed as resistance. During the upward correction from the beginning of March, the pair returned to this level. Given the fundamental expectations for AUD, the trading idea may consist in a short position on the pair with a short stop loss in the area of intersection with the trend line and wide profit target which can be corrected later.
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