AUD/USD fell to about 0.7205 in early Asian trade on Friday. Trading was cautious before the second and final day of talks in Beijing between US President Donald Trump and Chinese President Xi Jinping.
Trump said Xi likely has power to sway Iran and that he was not going to be much more patient on Iran. On Thursday, Trump said Xi offered to help negotiate an end to the war with Iran and keep the Strait of Hormuz open to global shipping.
Taiwan remained a focus, with Xi warning that mishandling China’s claims could lead to “clashes and even conflicts”. Any rise in US-China tensions can weigh on the Australian Dollar, as China is a key trading partner for Australia.
Hotter US inflation has led markets to expect the Federal Reserve to keep rates higher for longer. The CME FedWatch tool shows a 32.9% chance of a December rate rise of at least 25 basis points, up from 22.5% a week earlier.
The Australian Dollar is influenced by Reserve Bank of Australia rates, Chinese economic conditions, iron ore prices, inflation, growth, trade balances, and wider risk sentiment. Iron ore was valued at $118 billion a year in 2021, with China as the main destination.
We are seeing the AUD/USD pair struggle to hold its ground, reflecting a difficult environment for the Aussie dollar. The main drivers are a strong US Dollar, fueled by a hawkish Federal Reserve, and growing concerns about the health of the Chinese economy. These factors suggest that traders should be cautious about any potential strength in the pair.
This situation reminds us of similar dynamics we saw back in 2025 during the US-China talks, where geopolitical stress immediately weakened the Aussie. Today, the tensions are more economic, centered on trade and technology, but the effect is the same. This continued friction makes holding the AUD, which acts as a proxy for China’s economy, a risky bet.
The US Dollar’s strength is backed by solid data, with the latest Consumer Price Index for April 2026 coming in above expectations at 3.6%. Consequently, the market is now pricing in almost no chance of a Federal Reserve rate cut before the end of the third quarter. This policy outlook keeps the US Dollar attractive compared to other currencies.
Meanwhile, fundamentals supporting the Australian dollar appear to be weakening. China’s recent official manufacturing PMI dipped to 49.8, indicating a contraction and raising fears about demand for raw materials. This has pushed the price of iron ore, Australia’s most important export, down by nearly 8% over the past month to around $110 per tonne.
Given this backdrop, derivative traders should consider strategies that benefit from further AUD/USD weakness or increased volatility in the weeks ahead. Buying put options on the AUD/USD could provide downside exposure with a defined risk. Selling call option spreads could also be an effective strategy to capitalize on a range-bound or depreciating Australian dollar.
