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- AUD slips ahead of implementation of new U.S.-China tariffs.

- Tariffs to mark escalation of trade fight, weigh on risk appetite.

- China-exposed AUD at risk as USD strength to weigh says RBC.

- Tariffs come ahead of RBA and second quarter GDP growth data.

The Australian Dollar eased lower Friday as 'risk assets' fell from favour with investors ahead of a weekend that is expected to yield a further escalation of the U.S.-China trade war although the Antipodean unit is tipped by multiple analysts to remain under pressure for a while to come.

President Donald Trump is set to move ahead Sunday with a new tariff of 15% aimed at the remaining balance of Chinese exports to the U.S. not yet covered by punitive levies, although it will be December 15 before all of the country's trade with the U.S. is fully tariffed. Those exports waiting to be tariffed are worth around $300 bn each year, while the U.S. has $75 bn of exports to China that are set to be targeted in retaliation.

If the tariffs are not cancelled or deferred over the weekend break, the Australian Dollar might suffer at the opening of the new week because implementation would mark another escalation of the year-long trade conflict that drives a resolution further away and that potentially accelerates the ongoing global economic downturn. That would mean slower Chinese growth and lower commodity prices, both of which are typically bad for the China-exposed and commodity-backed Aussie.

"Markets are in a complacent mood, but further USD strength is ruining the mood for risk sentiment among the risky currencies. Next week looks important for further developments in the US-China trade policy showdown," says John Hardy, chief FX strategist at Saxo Bank. "The US dollar continues to grind stronger and risks maintaining this tendency until something is done to stop it by the Trump administration or the Fed."

Above: U.S. Dollar Index at daily intervals alongside AUD/USD rate (aqua green, left axis).

Sentiment toward both China and the global economy are key influences on the Australian Dollar because they are both significant price drivers for the commodity exports that help underwrite the Aussie, but analysis from RBC Capital Markets suggests the most important determinant of Australian Dollar price action at the moment is the direction of its U.S. counterpart.

RBC says China and commodities both play second fiddle to the greenback currently, and is tipping the U.S. Dollar to rise. The bank forecasts the AUD/USD rate will end 2019 at 0.68 and fall steadily to 0.66 before the end of September 2020. However, the Pound-to-Australian-Dollar rate is seen declining from 1.80 Friday to 1.76 by year-end, although it's forecast to rise to 1.87.

"While weaker iron ore and equity prices and greater China risk all help explain AUD/USD losses, the overwhelming driver was simply broad USD strength, which pulled AUD/USD down, despite rate spreads moving against USD," says RBC's Elsa Lignos. referring to the August period. "Combined with our relatively constructive view on USD, this raises the hurdle for equity or commodity prices or China risk dragging AUD/USD off post‐crisis lows. Our forecasts continue to have AUD/USD drifting lower."

Above: AUD/USD rate at daily intervals, alongside Pound-to-Aussie rate (aqua green, left axis).

The U.S. Dollar index has declined following the more recent escalations of the trade fight with China, but only because the greenback has ceded ground to safe-havens like the Japanese Yen and the current-account-surplus-protected Euro, which account for the lion's share of the index. The greenback has bested risk-sensitive rivals like the Aussie and Kiwi Dollars following each and every tariff announcement so only a delay or deferral of Sunday's levies to protect the Antipodean units next week.

However, even if a last minute delay to the tariffs does materialise, the currency will then have to face the Reserve Bank of Australia (RBA) on Tuesday and second-quarter GDP growth data on Wednesday. Both of those could ultimately weigh on the Aussie if they lead markets to bring forward the date at which they expect the RBA to cut its interest rate again. It's already slashed Aussie borrowing costs twice this year, taking the cash rate down from 1.5% to 1%.

"Monday’s bullish outside day pattern got us focused on a possible bottoming pattern for AUDUSD, but the market couldn’t get back above the 0.6780s by mid-week (important for confirming this pattern)," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. "The Reserve Bank of Australia will announce its latest decision on interest rates early Tuesday, and while recent RBA member commentary has suggested that they stand ready to cut rates further “if needed”, the OIS market doesn’t think it needs to happen next week (odds of a 25bp cut to 0.75% sit at just 11%)."

Above: AUD/USD rate at weekly intervals, alongside Pound-to-Aussie rate (aqua green, left axis).

The RBA left the cash rate unchanged at 1% earlier this month due mainly to uncertainty over the impact that an earlier two cuts would have on the outlook for the economy and inflation, minutes of the meeting revealed last week. However, the meeting record also showed policymakers agreed in they'd like to see an “accumulation of additional evidence” that additional stimulus is necessary before acting again and markets are now coalescing around the idea of a third 2019 cut coming in October.

Market bets on third 2019 rate could increase and ultimately weigh on the Australian Dollar next week if GDP data disappoints investors and underperforms RBA forecasts. The RBA said in August that "partial indicators" suggested "growth was firmer" last quarter than the 0.4% seen in the early months of the year and the market is now looking for an expansion of 0.5% for the three months to the end of June. But not everybody is behind that view.

"Weaker than anticipated partials mean we have adjusted our forecast for quarterly growth to 0.2%, below current consensus. A weak print will strengthen the case for an October rate cut," says Daniel Been, head of FX strategy at ANZ. "AUD and NZD remain vulnerable to the slow growth environment, with little buffer as yields are low and their policy cycles are broadly aligned to the global cycle. We have flattened out the rebound in our AUD forecasts a touch."

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