[ForexNews]

The Australian government announced today that it would impose a 16% provisional dumping duty on Chinese aluminium extrusions from 6 November. This announcement generated a significant sell-off in the AUD. The main concern for the AUD is retaliation by the Chinese, and this is the next headline investors should watch for. Although Chinese retaliation could generate a further negative reaction in the AUD, we would expect it to be small and temporary.

A significant Chinese response to Australia's move is unlikely. Since it imports mainly commodity products from Australia, imposing tariffs on these imports would add to China's costs and inflation. China cannot meet all of its commodity needs from other sources such as Brazil. Retaliation would also focus more global attention on the level of the Chinese currency, an issue the Chinese authorities would prefer to downplay. In addition, it is not in China's interests of to engage in a tit-for-tat trade war, given that it is the world's largest commodity importer.