The AUD/JPY currency pair hovered just above a fresh 24 1/2-month low of 86.112 on Monday, as concerns of a full-blown trade war potentially sending the global economy into a recession prompted investors to increase bets on larger interest rate cuts in Australia.
China announced on Friday it planned to implement 34% tariffs on all goods imported from the US as well as export curbs on some rare earth metals. The move came as a response to the Trump administration’s 54% duties imposed on Chinese imports.
This fueled concerns over an escalating trade conflict between the world’s first two largest economies and mounted pressure on the risk-sensitive Australian Dollar.
Due to Australia’s strong trade ties with both the United States and, particularly, China, the imposition of these tariffs raised concerns about future disruptions to its export sector and overall economic growth.
The Aussie Dollar’s sharp depreciation has prompted a recalibration of expectations regarding the Reserve Bank of Australia’s future monetary policy. Markets have begun to price in a more aggressive easing cycle, expecting that the central bank will need to lower interest rates more substantially to buffer the domestic economy from the potential negative effects of the trade war.
Markets are now pricing in a 20% chance that the RBA might deliver an out-sized 50 basis point rate cut in May.
“In terms of the outlook for the Aussie, it is bleak, it’s dire and it could get worse from here unless things are walked back,” Tony Sycamore, analyst at IG, was quoted as saying by Reuters.
“I mean there is no good option for the Aussie dollar if we’re going into a full blown trade war globally, and in particular with the frontline being tensions between China and the U.S.”
The AUD/JPY currency pair was last losing 0.25% on the day to trade at 88.504.
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