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- Buy AUD/USD as it could rise 1% this week say Barclays.

- Rebound comes as financial market risk-aversion wanes.

- But Fed meeting and Chinese data pose threat to the trade.

The Australian Dollar is to remain on the front foot this week as investors rediscover their appetite for risk, according strategists at Barclays, who are advocating the bank's clients bet on a rise in the Antipodean unit relative to the U.S. Dollar.

Behind the call is a newfound stability in Chinese Renmimbi exchange rates and a supportive commodity price environment which mean the currency could extend recent gains.

If the Barclays team is correct, this would mark the third consecutive week of gains for the Aussie, which could allow the currency to overturn the broader losses suffered thus far in 2018.

Above: The Australian Dollar is one of the worst performers of 2018. Image (C) Pound Sterling Live.

"A decline in risk aversion and market volatility is driving a reversal of safe haven flows and a short-term USD retracement. The market is starting to shrug off trade war news, and the coincidence of higher US Treasury yields alongside USD weakness of late suggest that safe-haven flows might be reversing," says Nikolaos Sgouropoulos, an FX strategist at Barclays.

Australia's currency has been among the hardest hit by President Donald Trump's so-called trade war against China, given that it's underwritten by the nation's commodity trade with the world's second largest economy and often serves as a surrogate for speculators seeking to express bearish views about China's own state-managed currency.

Commodity prices, which underpin Australia's Dollar, are highly sensitive to the ebb and flow of market expectations for global economic growth. As the world's largest consumer of commodities, the outlook for China's economy also has significant influence over the fortune of commodity markets.

President Trump has announced tariffs against more than $250 billion of China's annual exports to the U.S. in response to "unfair trading practices" that include the alleged forced transfer of technology and intellectual property theft. This has stoked fears of a global growth slowdown in 2018.

"The AUD has recently traded with a high sensitivity to CNY/CNH movements, in addition to its usual high beta to risk sentiment, but CNY weakness is currently being limited by the authorities," says Nikolaos Sgouropoulos, an FX strategist at Barclays. "While there are no major events in Australia in the coming week, a continued unwinding risk-off trades could support the AUD, considering that short positions in the currency remain fairly extended judging from Barclays VOLT and CFTC data."

The threat of an all-out economic war between the U.S. and China has driven the Australian Dollar nearly 6% lower over a six month period and has pushed China's stock market down by more than 15% for 2018. The U.S. Dollar index has risen by 5.4% over the same period, after having benefited from safe-haven flows.

However, financial markets appear to have become accustomed to the "trade war" and are no longer responding to the latest developments in the manner that they once were. This nascent phenomenon is best illustrated by the Australian Dollar's performance since the middle of September, when the White House unveiled its largest round of tariffs to date.

The Aussie has risen more than 2% against the U.S. greenback since then. Sgouropoulos and the Barclays team say this performance is part of a broader recovery in risk sentiment that could still endure for a while yet.

"We recommend going long AUDUSD as a tactical. risk-recovery trade, with an entry at 0.7285, targeting a 1% move to 0.7360, and with stop-loss level at 0.7248 for a 2:1 profit-to-loss ratio," says Sgouropoulos, in a note Monday.

The Australian Dollar was quoted 0.02% lower at 0.7249 against the U.S. Dollar during early trading Tuesday while the Pound-to-Australian-Dollar rate was 0.04% higher at 1.8094.

"The risks to the trade include a hawkish FOMC statement or set of economic projections this week, a weaker-than-expected China PMI report, or sharp reversal of risk sentiment driven by Emerging Market shocks, resulting in a technical rejection of the AUDUSD at the upper bound of the trend channel that has enveloped the cross since January this year," warns Sgouropoulos.

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