China’s Commerce Ministry announced new rules for rare earth exports. From 1 December, foreign entities will require a dual-use items export licence for shipping rare earth materials. Domestic exporters will also need to specify the ultimate destination for these shipments.

The Australian Dollar And Economic Factors

The Australian Dollar (AUD) traded 0.17% higher at 0.6597. Factors influencing the AUD include interest rates set by the Reserve Bank of Australia. High interest rates support the AUD’s value.

Since China is Australia’s largest trading partner, its economic health affects the AUD. A strong Chinese economy increases demand for Australian exports, lifting the currency’s value. Conversely, a downturn in China’s economy negatively impacts the AUD.

Iron Ore, Australia’s top export, significantly impacts the Australian Dollar. Rising Iron Ore prices boost the AUD due to increased demand from China. Conversely, falling prices can weaken the AUD.

Australia’s Trade Balance, which measures export earnings against import expenses, is crucial for the AUD. A positive Trade Balance strengthens the AUD due to surplus demand from foreign buyers for Australian exports. A negative Trade Balance, however, has the opposite effect.

Trade Friction And The Australian Dollar

With China’s new rules on rare earth exports set to begin on December 1st, we see this as a signal of increasing trade friction. This introduces significant uncertainty into global supply chains, which typically encourages a “risk-off” sentiment in markets. For a risk-sensitive currency like the Australian dollar, this is a fundamentally bearish development.

The health of the Chinese economy is a primary driver for the AUD, and these new restrictions could disrupt its fragile recovery. We’ve already seen China’s manufacturing PMI for September 2025 come in at a weak 50.1, barely in expansionary territory. Any further disruption to global trade is likely to dampen demand and negatively impact sentiment toward China-exposed assets.

This directly affects iron ore, Australia’s biggest export, as demand from Chinese steelmakers could soften. Iron ore prices have already shown weakness this year, falling to around $105 per tonne, reflecting ongoing concerns about China’s property sector. We expect further pressure on these prices, which will likely weigh on Australia’s trade balance and the value of the AUD.

While Australia is a major rare earths producer and could benefit from higher prices in the long run, the immediate market focus will be on the broader geopolitical risk. The initial small jump in the AUD/USD likely reflects short-term positioning, but the bigger picture of global trade uncertainty is a more powerful headwind. This reminds us of the market reaction when China imposed similar export controls on graphite back in late 2023, which created significant jitters.

Domestically, the Reserve Bank of Australia is in a holding pattern, keeping the cash rate at 4.5% as inflation remains sticky at 3.8%, still above the target band. However, if global growth fears escalate due to these trade tensions, market expectations could quickly shift towards earlier RBA rate cuts. This would erode the Aussie dollar’s yield advantage against the US dollar.

Therefore, in the coming weeks leading up to the December 1st deadline, we believe derivative traders should consider positions that benefit from a falling AUD/USD. Buying put options on the AUD/USD or establishing bear put spreads could be prudent strategies. These approaches allow for participation in potential downside while clearly defining risk in what will likely be a volatile period.

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