Australian Dollar: China Stimulus News Could Prove Supportive
- Written by: Gary Howes
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Above: Terminal, Shanghai, China. Image © Adobe Stock
China is set to announce a fresh set of stimulus measures aimed at boosting the economy, a development that could aid China-linked currencies such as the Australian and New Zealand Dollars.
Newswires are reporting Tuesday that China is considering at least a dozen stimulus measures including interest-rate reductions to support areas such as real estate and domestic demand.
The stimulus proposals, drafted by multiple government agencies include at least a dozen measures designed to support areas such as real estate and domestic demand, reports Bloomberg.
Interest-rate reductions are also among the policies under consideration, according to the report.
Investor speculation about looming cuts to China’s longer-term policy rates meanwhile intensified on Tuesday after the central bank unexpectedly lowered its seven-day reverse repurchase rate.
China is Australia's largest trading partner and destination for raw material exports, a major foreign exchange earner that bestows value on the Australian Dollar.
The news comes amidst a period of outperformance for the currency, courtesy of the Reserve Bank of Australia's most recent interest rate hike and hints that further hikes could be forthcoming.
The Chinese news could therefore extend the Aussie's June outperformance.
The news of incoming additional stimulus follows the People Bank of China's decision to cut the 7-day reverse repo rate by 10bps to 1.9% from 2.0% ahead of the announcement of the benchmark 1Y MLF rate on June 15.
The 7-day reverse repo rate and 1Y MLF rate were last cut by 10bps in Aug 2022.
"This did not come as a surprise as recent economic data suggests that China’s growth recovery has stalled due to weak external demand while the domestic property market continues to languish, says Ho Woei Chen, Economist at UOB in Singapore.
The latest attempts at stimulus by Chinese authorities are nevertheless expected by some China watchers to offer little impact in the near term, with Chen saying it will only be year-end when the Yuan starts to appreciate.
"We are of the view that a rebound in the CNY will likely start in 4Q23 when China’s economic recovery regains momentum," says Chen.
The performance of the Yuan is important from an Australian Dollar perspective given their positive correlation that stems from the close trading links between China and Australia.
The Chinese growth engine must kick up a gear for the AUD to move into a bull phase, something we will know is underway when the Yuan appreciates on a sustained basis.
