Australian Dollar Rebounds as China Chooses the "Good Scenario"

Image © Adobe Stock

The Australian and New Zealand Dollars remain enthralled by developments in China, where authorities are adapting their policy response to rising Covid cases and an increasingly uncompliant population.

The Australian Dollar was softer at the start of the week as markets reacted to weekend protests in China, confirming the strong correlation between the currency and Australia's largest trading partner.

Protests erupted across China amidst fears authorities would revert to a traditional 'hard' response to rising Covid cases, leading investors to lower expectations for the economy to return to full capacity anytime soon.

Allan von Mehren said China was facing a choice between reverting to harsher lockdowns to stem the current growing outbreak - with the risk of rising protests - or allowing the virus to spread further as a consequence of the latest easing of Covid rules.

"China seems to have decided on the latter and thus sends a signal that a path towards full reopening is taking place, albeit at a gradual pace," says Mehren in response to developments over the past 24 hours.

Most notably, China's National Health Commission (NHC) held a press briefing on Tuesday with some important messages.

According to Bloomberg, these are:

• China will accelerate vaccinations of people above 80
• China will hold officials doing excessive curbs responsible
• China is constantly adjusting Covid policies
• Officials must resolve public requests quickly

"China has reached a point, where the economic and social costs have become too big and now outweigh the health costs from a gradual opening," says Mehren.

The Australian Dollar rallied during October amidst signs China was adapting its Covid response in a more lenient direction, leading investors to bet on a more durable Chinese economic recovery.

This rally was however questioned in the face of rising Covid cases and the Australian Dollar duly retreated.

But, the intervention by the NHC confirms the reopening theme remains alive, aiding sentiment towards the Aussie Dollar in the process.

The Pound to Australian Dollar rallied 1.8068 as markets reacted to the weekend protests in China, but this advance has been pared notably over recent hours, taking spot back to 1.7824 and bank account AUD payment rates to approximately 1.7328. Competitive payment providers are quoting closer to 1.774 according to our data.

Against the U.S. Dollar the Aussie is 1.35% higher on Tuesday at 0.6741.

"AUD benefited from positive news on China's property sector and covid policy," says Carol Kong, an analyst at Commonwealth Bank of Australia. "The shift in tone on covid testing fuelled hopes that recent covid outbreaks and social unrest have not derailed China’s reopening plans, if any."

CBA analysts however caution a disorderly exit from China's zero covid policy now seems more likely than not because of the low level of vaccination among the elderly and the risk that hospitals struggle to deal with a high influx of intensive care patients.

Furthermore, the recent tightening of restrictions on movement in major cities will still be expected to have a negative impact on the Chinese economy.

But analysts at Danske Bank say the bigger picture is clear.

"For markets, households and companies, what is important is that you can now see an end to the zero-Covid policy and an improvement of the economy on the other side of the short-term chaos that could arise from a sharp rise in the virus spreading," says Danske Bank's von Mehren.

Danske Bank's economists do not think we will see a full reopening in China until the weather warms again and the elderly are fully vaccinated.

"But the conviction that China will leave the zero-Covid policy and pave the way for an economic rebound in H2 2023 has gone up," says von Mehren.

This is supportive of the Australian Dollar outlook.