China’s Commerce Ministry has announced new rules for exporting rare earth materials. Starting December 1, foreign companies will need a dual-use items export license to ship rare earths. Domestic exporters must also state where their shipments are ultimately headed.

The Australian Dollar and Economic Factors

The Australian Dollar (AUD) is trading 0.17% higher at 0.6597. Several factors affect the AUD, including the interest rates set by the Reserve Bank of Australia. Higher interest rates tend to support the value of the AUD. As China is Australia’s largest trading partner, its economic condition strongly impacts the AUD. When China’s economy is strong, demand for Australian exports rises, boosting the AUD. In contrast, if China’s economy weakens, the AUD may decline. Iron Ore, Australia’s top export, plays a significant role in the AUD’s performance. Increased Iron Ore prices tend to strengthen the AUD, driven by high demand from China. On the other hand, if prices drop, the AUD may weaken. Australia’s Trade Balance—measuring export earnings against import expenses—is vital for the AUD. A positive Trade Balance strengthens the AUD, as there is more demand for Australian exports from foreign buyers. A negative Trade Balance can have the reverse effect.

Trade Friction and the Australian Dollar

With China’s new rules on rare earth exports starting December 1, we see a rise in trade friction. This uncertainty impacts global supply chains and usually creates a “risk-off” sentiment in markets. For a risk-sensitive currency like the Australian dollar, this development is concerning. The state of the Chinese economy is a key driver of the AUD, and these new restrictions might hinder its fragile recovery. For instance, the manufacturing PMI for September 2025 in China was a weak 50.1, barely indicating growth. Any more disruptions to global trade could lower demand and create negative sentiment towards investments linked to China. This situation directly impacts iron ore, which is Australia’s largest export, as demand may decrease from Chinese steelmakers. Iron ore prices have been under pressure this year, dropping to about $105 per tonne due to worries about China’s property sector. This trend could pressure prices further, impacting Australia’s trade balance and the AUD’s value. While Australia produces a lot of rare earths and could benefit from higher prices in the long run, the immediate focus is on global geopolitical risks. The AUD/USD’s small increase likely reflects some short-term positioning, but the larger issue of trade uncertainty poses a considerable challenge. This situation is reminiscent of the market’s reaction when China imposed similar export controls on graphite in late 2023, which caused considerable unease. Domestically, the Reserve Bank of Australia is holding the cash rate steady at 4.5% while inflation remains elevated at 3.8%, above the desired range. However, if fears about global growth rise due to these trade tensions, market expectations could shift towards earlier interest rate cuts by the RBA. This shift could diminish the AUD’s yield advantage compared to the US dollar. In the weeks leading up to the December 1 deadline, we suggest that derivative traders consider positions that could benefit from a declining AUD/USD. Buying put options on the AUD/USD or establishing bear put spreads may be wise strategies. These tactics allow traders to capitalize on potential declines while managing their risk during what is likely to be a volatile period. Create your live VT Markets account and start trading now.

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