The recent 90-day truce in US-China trade talks has supported the AUD, as China is Australia’s largest trading partner. However, tensions remain. China’s Commerce Ministry condemned US chip sanctions as “unilateral bullying.” Australia-China ties are also strained, with Beijing criticizing Australia’s plan to revoke the Darwin Port lease to a Chinese firm. These geopolitical frictions could dampen AUD’s performance if tensions escalate.
Moreover, Trump’s tariff extension on the EU to July 9 has improved market sentiment. Risk appetite returned after the 50% tariff threat was delayed. This delay boosts AUD, but the upside remains fragile and dependent on Fed signals and Australia-China diplomacy.
USD/JPY Faces Downside as US Dollar Weakens on Debt and Policy Risks
USD/JPY continues its downward trend, pressured by US fiscal instability and mixed Fed signals. The pair trades below key levels as investors react to rising bond yields and concerns over future US borrowing. According to the CBO, Trump’s “One Big Beautiful Bill” could raise the deficit by $3.8 billion. This adds to an already dire projection of a $2.2 trillion annual deficit, cited by Senator Ron Johnson.
The US credit downgrade by Moody’s from Aaa to Aa1 has weakened the USD further. Moody’s expects US debt to hit 134% of GDP by 2035, up from 98% in 2023. The projected 9% budget deficit is also alarming. These figures highlight structural weaknesses in US fiscal policy. As a result, USD/JPY faces continued pressure, especially as markets price in potential Fed rate cuts later this year.
Fed speakers have added to the uncertainty. Neel Kashkari warned that extended tariffs could lead to stagflation, while Goolsbee suggested Trump’s tariff threats may delay policy shifts. Fed Governor Waller said the economy could handle 10% tariffs, but also acknowledged fiscal policy concerns. The mixed tone from the Fed weakens market confidence and adds volatility to USD/JPY.
