Australian Dollar's Rally Starts to Convince

"Tourism, education and property sectors in Australia could benefit if relations between China and Australia start to warm up. This is positive for AUD" - OCBC.

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The Chinese reopening story is once again proving upside impetus to the Australian Dollar which extends an advance against the British Pound while breaking above a key technical level against the U.S. Dollar.

The Aussie currency rose at the start of a new week after reports China had lifted quarantine rules for inbound travellers, ending nearly three years of self-imposed isolation.

The steps are the latest in the country's rapid abolition of the zero-Covid policy that has curtailed domestic economic activity and comes despite a surge in domestic Covid cases.

The developments have lifted investor expectations for a sharper economic recovery in the world's second-largest economy over the coming weeks and months, which is aiding China-focused proxies such as the Australian Dollar.

"The Yuan is at its strongest level since mid-August, the Won its best since June, and the Baht at its best since April. The Australian dollar is at its best level since the end of August. This rising tide is lifting most regional boats," says Kit Juckes, head of foreign exchange strategy and research at Société Générale.

387 passengers on board flights from Singapore and Toronto were the first to land where passengers were not subject to Covid-19 tests on arrival and did not have to undergo five days of quarantine at centralised government facilities.

"The dismantling of more barriers to entry into China has seen more trickles of optimism seep into financial markets," says Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown. "Hopes are high that this will give consumers a big jolt of confidence, and help power China’s recovery from the pandemic, particularly once waves of infections subside."

The implications for Australia's economy could be significant.

"Tourism, education and property sectors in Australia could benefit if relations between China and Australia start to warm up. This is positive for AUD. Not forgetting China reopening story and Fed policy calibration thematic that can further add to long AUD bias," says Christopher Wong, FX Strategist at OCBC Bank.

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Chinese students are estimated to be worth about $40BN to the Australian economy and there are reports of a surge in applications from China to Australian universities over recent weeks.

Economists at J.P.Morgan estimate that over the next two years, the country's GDP will grow 1.0% thanks to inbound Chinese students and holidaymakers likely returning.

International Education Association of Australia chief executive Phil Honeywood said several education agencies in China reported "massive" rises in inquiries from their students after Prime Minister Anthony Albanese met the Chinese president in Bali in November.

"I have a strong view the change of government has definitely helped us with the Chinese market," said Honeywood.

Further signs of improved relations follow the visit of Australian Foreign Minister Penny Wong to China recently.

The Australian Dollar rallied last week on reports that China was readying to end a ban on imports of Australian coal, boosting the prospects of Australia's second-most valuable commodity export and foreign exchange earner.

Reports suggested Chinese imports of Australian coal could resume by April, however by the end of the week headlines landed that confirmed some Chinese companies had in fact already booked cargos.

China's resumption of coal imports from Australia is a positive for commodities and the Aussie Dollar, says OCBC's Wong.

More analysts are expectant of Australian Dollar gains given the evolving macroeconomic backdrop.

"We expect AUDUSD to outperform, drawing on rising optimism around a China recovery. Reports indicating that China is considering resuming imports of Australian coal likely boosted sentiment and reinforced expectations of China-related tailwinds," says a weekly currency research briefing from Barclays.

The Australian Dollar to U.S. Dollar exchange rate (AUD/USD) has rallied to 0.6940 while the Pound to Australian Dollar exchange rate (GBP/AUD) has extended a clear near-term downtrend and is on the cusp of testing support at 1.7550.

Above: AUD/USD (top) and GBP/AUD showing key levels that are under threat from Aussie Dollar outperformance. Consider setting a free FX rate alert here to better time your payment requirements.

"We have a tactical positive bias on AUD as Australia’s relationship with China continues to thaw and China presses ahead with reopening, regardless of the near-term impact on infection rates," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.

John Hardy, Head of FX Strategy at Saxo Bank, notes bullish technical developments on the charts as AUD/USD has jumped to a new four-month high, clearing its 200-day moving average in the process.

"With the US dollar suffering its longest streak of weekly drops in two months, the Aussie dollar broke above its 200-day moving average for the first time since last April and traded above 0.6900 for the first time since last August," he says.

The Dollar fell on Friday following the release of some surprising U.S. data that suggested growth in the world's largest economy was starting to slow notably.

"The U.S. dollar started the week on the back foot, losing ground to other major currencies and approaching December’s lows. Investors have started pricing in a less aggressive stance from the Federal Reserve, following the release of jobs numbers on Friday that showed that, albeit unhurriedly, the US economy is starting to slow down," says Ricardo Evangelista, Senior Analyst at ActivTrades.