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Coal-fired AUD: Aussie dollar leaps on hopes of end to China ban on coal imports

By Adrian Holliday

12:33, 4 January 2023

Hunter Valley Oz miner prepares for work
Hunter Valley Australian miner Ben Oldham, 22 February 2006; AUD is on the up on better China trade sentiment – Getty

Surging optimism that China will tear up its Oz coal import ban has fired AUD/USD 2% higher. Mid-morning AUD/USD had soared to 0.6867 from 0.6720 late yesterday. 

The Sino-Oz trade rumours have been building for months but substance has been thin until now.

The ban was unofficially bolted into place in the second half of 2020 by Beijing – a Covid blame-game with Canberra, amongst other issues, was in play. 

Will a diplomatic defrost between the major trade partners give AUD more distance on its mid October 0.62 low?

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Are Chinese relations with Canberra on the up, boosting AUD?

AUD Minecraft: trade vs sentiment

Derek Halpenny, head of research at MUFG Bank, warns that the coal-fired rumours look more a sentiment play than a trade play; AUD/USD remains well down – around -4.5% – over 12 months, still. 

“From a direct terms of trade impact we are not convinced this will have a big lasting impact.” Halpenny points out Australia managed to switch exporting to other countries to pick up the flex, like stronger Oz exports to Japan.

"China may have grown concerned that increased demand for coal globally due to the Russia energy supply restrictions could create difficulties for China if it maintains its refusal to import from Australia.” 

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He adds: “We would assume if China comes back on line, it would to some degree be at the expense of elsewhere.”

Several major Chinese importers – China Huaneng Group Co and China Energy Investment Corp amongst others – are poised to make new purchases. Reuters this morning reported that both companies had been given permission to buy Canberra-backed coal.

According to the Observatory of Economic Complexities (OEC) coal is Australia’s second largest export (AUD 36.4bn in 2020) taking 14.5% of total exports. Bloomberg data claims a quarter of 2020’s export total went to China.

USD/JPY

151.22 Price
-0.030% 1D Chg, %
Long position overnight fee 0.0113%
Short position overnight fee -0.0195%
Overnight fee time 21:00 (UTC)
Spread 0.010

GBP/USD

1.26 Price
-0.050% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00013

AUD/USD

0.65 Price
-0.270% 1D Chg, %
Long position overnight fee -0.0073%
Short position overnight fee -0.0009%
Overnight fee time 21:00 (UTC)
Spread 0.00006

EUR/USD

1.08 Price
-0.260% 1D Chg, %
Long position overnight fee -0.0080%
Short position overnight fee -0.0002%
Overnight fee time 21:00 (UTC)
Spread 0.00006

So any shift in Chinese policy is a big deal.

The coal truth? 

China itself has been battling severe power supply challenges; coal represent two-thirds of China’s power generation. But the commodity tensions are complex. 

Chinese power producers tend to buy coal at market rates but sell their electricity at capped government tariffs, so there’s little incentive to increase electricity generation.

Towards the end of 2020 China confirmed a 2060 carbon-neutrality pledge and a raft of promises for decarbonising its power market arrived. But finding replacements for its coal fleet is difficult. 

Local distortions

Large swathes of Chinese coal power investment is signed off at local level, not national. This decentralising tends to mean higher approval chances for local coal power projects, so compromising the bigger ‘green’ picture.

For now, AUD’s 24-hour price spurt will pivot, to a greater or lesser extent, on the forthcoming US ISM manufacturing PMI data plus minutes of the Fed’s December meeting due later. 

How resilient the US mood remains to be seen – but greater stamina means interest rates will likely stay higher for longer.

“The temptation facing Jay Powell [Fed Reserve chairman],” City commentator Bill Blain said earlier, “and his colleagues will be to do less with interest rates – in the hope that wage inflation pressures will naturally moderate, and slower rate rises will avoid triggering recession. But…hope is never a good strategy.”

A bit after midday DXY had slumped 0.53% to 103.81 while EUR/USD was 0.51% up at 1.0608; GBP/USD was 0.72% higher at 1.2058; USD/JPY was 0.21% lower at 130.79.

Fx Strategist And Finance Consultant At Keirstone, Francis Fabrizi 

  • AUD/USD has broken above the 0.6800 resistance level this morning and is now attempting to test 0.6900. If price breaks and holds above 0.6900, it is possible 0.7000 will be the next target.”
  • “If price is unable to maintain its strength past 0.6900, I believe we will see it fall back down towards 0.6675.”
  • “Looking at the weekly timeframe, this pair remains in a bearish trend therefore I feel we will see price gain bearish momentum soon as long as it remains below 0.7000.”

Markets in this article

AUD/USD
AUD/USD
0.65186 USD
-0.00174 -0.270%
EUR/USD
EUR/USD
1.08001 USD
-0.00279 -0.260%
GBP/USD
GBP/USD
1.26356 USD
-0.00065 -0.050%
DXY
US Dollar Index
104.146 USD
0.199 +0.190%
USD/JPY
USD/JPY
151.222 USD
-0.04 -0.030%

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