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- AUD rises despite escalating U.S.-China trade tariff threat.

- New U.S. tariffs to come in days, dealing blow to the AUD.

- Bank of America say "sell" while Deutsche aims for mid 0.70's.

The Australian Dollar rose in response to a weaker greenback but the U.S. is threatening to levy another round of tariffs on Chinese goods exports and Bank of America strategists are saying to sell the Antipodean unit.

Australia's Dollar was on the front foot Monday as the U.S. greenback weakened, marking a reversal of last week's price action, despite a series of reports suggesting the White House may go ahead with a plan to levy tariffs on $200 billion of imports from China.

The Wall Street Journal reported at the weekend that President Donald Trump will proceed with the previously announced tariffs in order to raise pressure on China ahead of bilateral talks Treasury Secretary Stephen Mnuchin is believed be organising, but it might not work.

This is because the Global Times, a journal of the Communist Party-owned People's Daily, published an editorial Monday in which it claimed such a move would simply beget more retaliation. And the Wall Street Journal cited Chinese diplomatic sources for its claim that China will not attend the latest round of talks if Trump moves ahead with the levies.

"While Washington extends a carrot to Beijing, it is also swinging a stick. It is nothing new for the US to try to escalate tensions so as to exploit more gains at the negotiating table. The unilateral and hegemonic moves by the US will meet firm countermeasures from China...China will not just play defense," the Global Times editorial reads.

Those reports encouraged yet more losses in Chinese stock markets Monday, with the Shanghai Composite index falling more than 1% to 2,651, which took its 2018 loss to a total of 19.8%. However, with the People's Bank of China having set a lower reference rate fix for the Renmimbi, the weakness was not reflected in the currency.

The USD/CNH rate was down -0.11% at 6.8833 in London Monday. Stability in the state-managed currency may be partly behind the Monday decline of the safe-haven U.S. Dollar, and rise of the risk-sensitive Australian Dollar.

The Aussie, as a free floating currency that is also heavily exposed to the fortunes of the Chinese economy and commodity markets, often mimicks movements in the Renmimbi.

"Time zone analysis and our MAA positioning model are bearish AUD/USD this week. AUD/USD has sunk in Asia and US hours, falling for several weeks in a row . We see locals take a sharply bearish view, given escalating trade tensions. In addition, the USD is in demand in Asia hours broadly," says Vadim Iralov, a quantitative strategist at Bank of America Merrill Lynch.

Bank of America's Iralov says clients should bet on a fall in the AUD/USD rate this week and notes a reference price of 0.7190. The AUD/USD rate was quoted 0.57% higher at 0.7190 during noon trading Monday, while the Pound-to-Australian-Dollar rate was up 0.25% at 1.8281.

Australia's Dollar has been badly bruised this year, initially by a deteriorating outlook for domestic interest rates and more recently, by the White House having gone toe-to-toe with China over allegations of "unfair" trading practices that include the "forced transfer of intellectual property".

The AUD/USD rate has fallen 8% while the Pound-to-Australian-Dollar rate has risen 5% in 2018. Australia's Dollar has shed more than 4% against all developed world currencies other than the New Zealand Dollar.

"It is unclear when the tariff announcement will be made but the report clearly highlights that trade tensions between the US and China remain more likely to escalate further than de-escalate at this stage," says Lee Hardman, a currency analyst at MUFG. "Trade tensions continue to pose downside risks for high beta commodity and emerging market currencies."

Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country - and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be “Tariffed!”

— Donald J. Trump (@realDonaldTrump) 17 September 2018Speculation of another escalation in the trade war comes just hours before the Reserve Bank of Australia (RBA) is set to publish minutes of its latest meeting, which markets will scrutinise closely for signs of concern over the housing and mortgage markets. The minutes will be released at 02:30 London time.

Domestic lenders are already raising their mortgage rates in order to counter the effect of rising wholesale funding costs which, for the Aussie economy, is almost the same thing as the RBA having raised interest rates itself.

This is bad for the currency because the RBA has held rates at a record low of 1.5% for more than two years in order to stoke inflation pressures by stimulating the economy with cheap credit. Inflation has repeatedly failed to hold above the lower bound of the 2% to 3% target in recent years.

Expressions of concern about the policy or economic implications of domestic lenders raising mortgage rates could in theory deal another blow to the currency, although analyst forecasts and commentary suggest markets have all but given up on the idea that rates might rise any time soon.

Few analysts still expect an RBA rate rise to come before 2020. If anything this could mean that with another escalation of the US-China trade war aside, things have already gotten about as bad as they are likely to for the Aussie currency. Deutsche Bank forecasts the AUD/USD rate will rise back to 0.75 before year-end before recovering to 0.76 in 2019.

"We expect AUD/USD to hang around the mid-70s over the forecast horizon," says Time Baker, an FX strategist at Deutsche Bank. "The weakness in the domestic story does persist – growth is sub-trend, and consumers aren’t feeling particularly upbeat. Reflecting this environment, the rate differential is about the worst it has been. But this is all well known by the market now, and seems largely priced."

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