AUD/USD falls towards the bottom of the week's range, bearish bias prevails

• AUD/USD under pressure, embarking on the week's lower bound of the range.
• AUD pressured by trade wars, risk-off and a resurgence in the USD. 

AUD/USD is currently trading at 0.6452 and is down from a high of 0.6524 to a low of 0.6441, -0.28% at the time of writing. The US dollar is on the march today (DXY +0.18% at the time of writing) following Federal Reserve's Chairman Jerome Powell's comments. 

Firstly, it's key to note that AUD will be vulnerable to the shift in the narrative between the US, Australia and China. We are entering the realm of severe risk-off again pertaining to trade wars coming back to the fore. This time, however, Australia has joined the mix. 

Trade wars are back with a vengeance 

Australia’s call for an investigation into China’s role as the origin of the COVID-19 pandemic has pulled the tail of the dragon. This is now quickly morphing into a trade war, one of which is bound to rattle investor's nerves who are already having to contend with the prospects of major flare-ups of COVID-19 contagion. 

The Australian Trade Minister, Simon Birmingham, is seeking talks with counterpart Zhong Shan to try and settle down tensions following Beijing's move earlier this week to block imports of Australian barley and beef. At a time where Australia is already suffering the economic impact of lockdowns ( losing US$2.6 billion a week), this is the last surprise the nation needs right now. Australia’s barley shipments to China are worth about US$1 billion a year and the beef ban will affect about one-third of the country’s exports to China, with an annual value of US$800 million.

You’ve got hundreds of thousands of people who’ve died, millions who’ve lost their jobs and billions who’ve had their lives disrupted, the least the world can expect is that there be an investigation and Australia’s far from a lone voice in advancing that,

– Birmingham said.

Meanwhile, this by no means that Australia will submit to China's trade threats and loosen its squeeze over China's handling of the COVID-19, for both Australia and the US are making serious allegations. 

I was very clear that in no way would Australia change our public health policies or our national security policies or any of our policy positions under threat of economic coercion and that remains very much the case,

– Birmingham stressed. 

When you couple the above with the increasingly harsh rhetoric from Washington and Beijing, the tensions couldn't come at a worse possible time for markets. At the start of this week, White House trade adviser Peter Navarro said China should pay for its role in spreading the coronavirus. “A bill has to come due for China,” Navarro told CNBC. “They inflicted tremendous damage on the world which is still ongoing,” Navarro said, and even suggested that the US could impose new tariffs or to walk away altogether from the phase one deal that had put a milestone down within a bitter 18-month battle between the world's two largest economies and roiled markets.

Since the start of the FX week, AUD/USD has fallen from a high of 0.6561 to a low of 0.6432. The flow has not been all way one mind you. The US dollar has been mixed and there have been some Australian data that were not bad as expected. However, the path of least resistance, fundamentally, is weighted to the downside at this juncture. 

"It's a trade war remix tape coupled with the uncertainty over the economic outlook and the shape of things to come," analysts at Westpac said. "The resulting stress leaves AUD vulnerable to a setback, especially as it has closely tracked MSCI China."

ALL FOMC members against negative rates

Meanwhile, Fed's Powell's comments fuelled a spike in the US dollar on Wednesday, further adding to the bearish case for AUD/USD. Powell noted that the FOMC's view on negative rates has not changed and reiterated that it's not something the Fed is looking at.

"The Fed intends to continue using tools it has already tried," Powell said in answer to questions at an event organized by the Peterson Institue for International Economics.

Previous minutes on negative rates debate says all FOMC participants were against them.

AUD/USD levels