AUD/USD rebounds from five-year low amid escalating US-China tariffs

Chinese retaliation intensifies trade tensions

The Australian dollar (AUD) hit a fresh five-year low this morning at 0.5933, before rebounding back above 0.6000 as risk aversion flows eased.

This morning's drop came after China's retaliatory move on Friday night, which included a 34% tariff on all United States (US) imports. China's retaliation was in response to the Trump administration's announcement last week of a hefty new 34% tariff on Chinese imports, which raised the cumulative rate of US tariffs on Chinese imports to 64%.

Unlike the trade war in 2018, this time, China's regional supply-chain partners, such as Vietnam, have also been directly targeted with hefty new tariffs. These new tariffs are expected to have a significant impact on China's economy, which is already grappling with issues such as wage deflation, weak employment, and housing challenges.

AUD/USD as a China proxy

As China is Australia's largest trading partner, the fortunes of the AUD are closely tied to those of the Chinese economy. The connection means that AUD/USD is often used by traders as a proxy for the Chinese currency, the Chinese yuan.

There are mounting fears that Chinese authorities will soon devalue their currency to cushion the impact of US tariffs.

RBA rate cut expectations shift

In addition, concerns over a looming recession have prompted an aggressive repricing of Reserve Bank of Australia (RBA) interest rate cut expectations for 2025. The Australian interest rate market is pricing in 33 basis points (bp) of RBA rate cuts for May, which means it is fully priced for a 25 bp cut in May, and there is a ~30% chance of a supersized 50 bp cut in May.

There is a cumulative 110 bp of RBA rate cuts priced between now and the end of 2025, which would see the RBA's cash rate end the year at 3%.

Risk sentiment deterioration

Finally, the steep decline in risk sentiment following last week's tariff announcements is raising concerns of a potential liquidity crunch. A liquidity crunch would further hasten the flow of capital away from the AUD and New Zealand dollar in favour of the US dollar and Japanese yen.

AUD/USD technical analysis

After striking a low of 0.6087 in early February, AUD/USD commenced a rally, which we opined was a correction to the decline from the September high of 0.6942 to the 0.6087 low.

The correction took the shape of a triangle-style 'ABCDE' five-wave correction, falling short of the 200-day moving average (MA) at 0.6500 and displaying a sequence of lower highs and higher lows before breaking through support at 0.6210 – 0.6200 on Friday.

Although AUD/USD's rebound above 0.6000 today is impressive in the short term, it remains at risk of a deeper drop towards the Covid-19 crash low of 0.5509 unless last week's new tariffs are reversed in upcoming sessions.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 7 April 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}