Aussie/China Tensions Back in Focus

The trade war between China and Australia was a key theme over last year and much of this year. However, global focus has pivoted over recent month. The spiralling inflation crisis, deepening supply-chain issues, and a hawkish shift among G10 central banks, have all commanded investor focus. Investors were reminded this week, however, that the issue is far from resolved and infact, might be about to worsen.

Taiwan Dispute

Amidst the ongoing furore over Australian PM Abbot’s recent visit to Taiwan, Chinese state media warned this week that "the worst is probably yet to come", referring to tensions between China and Australia. The two nations have been at loggerheads since early last year when Australia spearheaded calls for an investigation into China’s role in the outbreak of COVID and its handling of the pandemic.

China is now taking issue with Australia once again over Abbot attending a national security forum in Taiwan. During his speech, Abbot was keen to take aim at China, labelling Xi Jinping the “new red emperor”. Abbot listed a series of offences committed by China over recent years, including the national security law imposed in Hong Kong, the human rights abuses of the Uighurs community and the recent conflict with India in the Himalayas as well as its ongoing calls to “reunify” with Taiwan.

Trade Risks

As a result of China’s issue with Australia, the country has launched a series of trade embargoes on many Australian imports. Given that China is Australia’s largest trading partner, the moves have had serious repercussions for Australian trade. However, recent data shows that many sectors and providers have been able to pivot into new markets. Additionally, the recent energy crisis has created large demand for Aussie coal with even China having to U-turn and accept shipments.

Looking ahead, the situation is certainly worth monitoring as any uptick in conflict between the two nations, particularly over Taiwan, risks spilling over into global relations and could act as a fresh downside catalyst for risk appetite. For now, however, the main focus is on the Evergrande situation which continues to be the main threat to China.

Technical Views

AUDUSD

The Aussie is sitting at a key level here. Price is once again testing above the bearish trend line from 2021 highs along with the .7339 resistance. There are upside risks here now given that, the recent low can be viewed as a higher-low double bottom against the .7112 lows. Both MACD and RSI are bullish also. However, bulls will need to see a break of .7413 to encourage momentum for a reversal.