Australian Dollar: China Boost Set to Extend

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The Australian Dollar joined commodities, stocks and risk-sensitive currencies by going higher at the start of a new week amidst a retreat in the Dollar and some positive data out of China and further underscoring a short-term trend of appreciation.

Data showed China's inflation returned to positive territory in August, while the country's new bank loans jumped by more than expected last month, reflecting signs of economic stabilisation of the major commodity consumer.

"AUD is up against all G10s overnight as stronger than expected Chinese data lifted China sensitive assets and the broad dollar selloff is a tailwind to the high beta AUD," says Noah Buffam, an analyst at CIBC Capital Markets.

The Australian Dollar tends to benefit in such an environment owing to Australia's significant raw material export exposure to China. The Australian Dollar-U.S. Dollar exchange rate is a sizeable 0.90% higher at 0.6434 at the time of writing Monday. "AUD/USD has rallied in recent sessions and is now trading above the 0.6400 level," says Buffman. 

The Pound to Australian Dollar was meanwhile 0.40% lower at 1.9463, marking the lowest level for the exchange rate since August 11. 

New loans made by Chinese banks rose 1,360.0BN yuan in August, outstripping expectations for a reading of 1,200.0BN and making for a marked improvement on July's 345.9BN. "New loans were driven higher by corporate loans, while TSF was higher due to stronger local government bond issuance," says Buffman.

But it was signs of easing deflation pressures that provided the market with a boost at the start of the new week with China reporting CPI inflation rose 0.1% y/y in August, up from a deflationary -0.3% in July.

Deflationary trends can be associated with a soft economy and the price growth reported in August would hint that perhaps the worst of the recent slowdown is has come to pass.

Above: GBPAUD at daily intervals showing the near-term trend of AUD appreciation that could extend further

The People's Bank of China (PBoC) meanwhile retrieved the yuan from a 16-year low by setting the strongest official midpoint fixing – as compared with market expectations – on record.

The Australian Dollar has a positive correlation with the yuan and the developments only aided the firm start for the antipodean currency at the start of the new week.

But sentiment was further aided by a broad retreat in the U.S. Dollar - itself a pro-risk development.

"The seemingly unstoppable dollar run is being dented this morning by two currencies that had all but contributed to consolidating USD strength until now: the yen and the yuan," says Francesco Pesole, FX Strategist at ING Bank.

Pesole explains the Bank of Japan's Governor Kazuo Ueda released an interview where he said policymakers may have enough information by year-end – if wage
inflation continues – to make a decision on unwinding some monetary stimulus.

"The market reaction to this has been significant. The overbought USD/JPY is falling and testing 146.00, and the benchmark JGB yields are at 0.70% despite the BoJ deploying the loans-for-bonds programme to curb yields," says Pesole.

The move weighed on the Dollar across the board, aiding pro-cyclical currencies such as the Aussie.

The Australian Dollar meanwhile looks to be entering a short-term trend of strength against the Pound that could extend to the 1.93 level this week.