The Australian dollar (AUD) held firm after China's retaliation after new US tariffs of 10% on all imports from China came into effect on Tuesday (4/2). China's Ministry of Commerce announced that it would impose 15% tariffs on US coal and liquefied natural gas (LNG) imports, along with additional 10% tariffs on crude oil, farm equipment and certain cars. Additionally, to "safeguard national security interests," China imposed export controls on tungsten, tellurium, ruthenium, molybdenum and related products.

The AUD/USD pair faces challenges as market volatility remains a concern as investors monitor developments in the ongoing trade war between the US and China, Australia's main trading partners. Trump said on Monday afternoon that he would likely speak to China in the next 24 hours. He also warned, "If we can't reach a deal with China, the tariffs will be very, very large."

President Trump said he would suspend high tariffs on Mexico and Canada after their leaders agreed to deploy 10,000 troops to the US border to combat drug trafficking. Tariffs on Mexico and Canada have been suspended for at least 30 days. The decision comes just two days after Trump imposed 25% tariffs on Mexican and Canadian goods and 10% tariffs on Chinese imports.

According to the Financial Times, Chinese exporters are stepping up their efforts to move production overseas in response to Trump's tariffs. Manufacturers in China are accelerating plans to relocate production to other countries, including the Middle East, to avoid US tariffs. Other tactics being considered include passing on increased costs to US consumers and exploring alternative markets.

The AUD may weaken amid the increasing likelihood that the Reserve Bank of Australia (RBA) could consider cutting interest rates in February. The RBA has kept the Official Cash Rate (OCR) at 4.35% since November 2023, saying inflation must return "sustainably" to its 2%-3% target range before any policy easing. Westpac notes that confidence in the RBA starting to cut rates at its February 18 Board meeting is expected to remain steady this week. Westpac continues to see a 100 basis point rate cut by 2025, while market expectations are slightly more conservative.

Source: Bloomberg