- AUD has enjoyed a stellar 2020

- But lion's share of gains are now in says Rabobank

- Iron ore exports are Australia's Achilles heal

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GBP/AUD spot rate at time of publication: 1.7818Bank transfer rate (indicative guide): 1.7194-1.7319FX specialist providers (indicative guide): 1.7400-1.7693More information on FX specialist rates hereA one-sided trade war with China has yet to leave an impact on sentiment towards Australia's economy in general and the Australian Dollar in particular, but this could soon change.

According to a new foreign exchange strategy note out from Rabobank, 2020's stellar appreciation for the Aussie currency might not extend into 2021 given the potential for tensions to rise further between Beijing and Canberra.

"AUD bulls are likely to face a few hurdles in the New Year," says Jane Foley, Senior FX Strategist with Rabobank in London.

Rabobank acknowledge the Aussie Dollar's impressive run in 2020, but the feeling at the Dutch-based lender is that the rally will be ultimately soon be questioned

"To date, the export goods that have been impacted by Chinese/Australian trade issues are unlikely to dent total Australian GDP significantly," notes Foley.

Goods that have thus far felt the pinch from restive Chinese authorities include barley, beef, wine and other agricultural exports.

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"This week’s headlines, however, regarding coal and iron ore refer to Australia’s largest exports. Thus is increase in tensions focussed on these goods could be far costlier to Australia’s economic outlook," says Foley.

Foley says the Australian Dollar's stumble in Wednesday's trading session might have something to do with simmering concerns amongst market participants over China-Australia trade relations.

"The sour tone in the AUD was also likely a function of headlines suggesting a worsening of trade tensions with China. Reports that Australian coal producers may be excluded from China’s coal market and news that China’s Iron and Steel Association are calling for tighter regulation for supplies both hinted at a worsening in the already tense relationship," says Foley.

Australia appears to have banned local importers from acquiring Australian coal, which is of a grade that is largely used in power generation.

"Reports that China had formally black-listed Australia coal, if verified, would a huge blow," adds Foley.

But it is iron ore that really matters for Australia.

China's one-sided trade war with Australia has ultimately proved futile given that the price of iron ore has rocketed over recent months, bolstering the country's trade position just as China seeks to undermine it.

Indeed, iron ore prices have risen to the extent that the Chinese Iron and Steel Association (CISA) have called on their government to intervene.

Iron ore prices hit $153 per tonne on Wednesday, after reaching nearly US$160 a tonne last week, which is nearly double the price at the start of the year.

CISA has engaged iron ore miners Rio Tinto and BHP Billiton this week and said the current ore price was "unreasonable".

China imports 60% of its iron ore requirements from Australia and is heavily dependent on the commodity. Iron ore exports to China are meanwhile Australia's single largest export and foreign exchange earner.

Australia's trade balance reached a surplus of $7.5BN in October 2020, ensuring that a strong recovery from a mid-year dip extends. Indeed, the multi-year trend is one of resolute improvement:

But with complaints about the cost of iron ore from China's iron industry rising, concerns that the government might act will grow.

The South China Morning Post reports that the spike in iron ore prices has turned heads in Beijing’s policymaking circles, with some seeing it as a threat to industrial security – a highlight of President Xi Jinping’s newly released long-term development vision, according to analysts.

It is still unclear just what measures China could adopt in order to hit Australia's iron ore exports, while not compromising its own industry.

China would presumably only be in a position to build leverage were alternative suppliers of ore to come into play.

Australia and Brazil remain the dominant suppliers and a recovery in Brazilian output after a torrid year for the South American country's iron ore producing sector would likely be welcomed by China.

"Bulls should beware of the potential pitfalls facing the AUD. We suspect upside potential will be tempered," says Foley.

Rabobank's forecasts for the Australian Dollar-U.S. Dollar exchange rate are at 0.76, which is not far from current levels at 0.7617.

Should upside in AUD/USD start to fade then we would expect to see the downside pressures in the Pound-to-Australian Dollar exchange rate ease too.

Therefore, should the AUD/USD rally fade - as per Rabobank's expectations - and a post-Brexit trade deal result in a recovery in Sterling, then GBP/AUD could recover over coming months.