Australian Dollar: Winning Streak Boosted by Chinese Data Beats

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The Australian Dollar extended a winning streak following the release of positive data out of China that suggests the worst of the country's economic downturn is behind us, a day after domestic job figures beat expectations.

China reported stronger-than-expected retail sales figures with growth coming in 4.6% year on year against the market consensus of 3.0%.

Chinese industrial production printed at 4.5% y/y against 3.9% consensus and the jobless rate survey read at 5.2% against a consensus expectation of 5.3%.

"AUD has been the best performer against the US dollar on the G10 board so far this week, on the back of a supported risk sentiment. The performance has been further boosted by a strong August labour market report yesterday and signs of improvement in China’s activity data as well as the surge in iron ore prices," says Charu Chanana, Market Strategist at Saxo Bank.

In addition, the People's Bank of China left the one-year medium-term facility rate unchanged but cut the 14-day reverse repo to 1.95% in a move aimed at stimulating activity.

"This better-than-expected economic data came after sentiment was boosted by RRR cut announcement late on Thursday that followed an interest rate cut on medium-term loans earlier, and more liquidity injections were seen today. Overall, these measures hinted that the easing stance of Chinese authorities may be getting more aggressive," says Chanana.

The data supported investor risk sentiment and was reflected in rising Asian equity markets, with a predictable positive knock-on effect for the Australian Dollar.

The Pound to Australian Dollar exchange rate extended a decline by a third of a per cent to quote at 1.9216, the lowest level since August 01. The Australian Dollar-U.S. Dollar rate rallied 0.45% to quote at 0.6468.

"AUD/USD lifted above 0.6460 thanks to better-than-expected Chinese economic data. Commodity prices, especially iron ore prices, rose strongly," says Carol Kong, a strategist at Commonwealth Bank.

The Australian Dollar has been one of the main conduits for investor pessimism over the lacklustre post-pandemic rebound in the Chinese economy and any sense that the worst has passed will help Chinese-linked assets such as the Aussie.

"In our view, the trajectory of AUD remains largely in the hands of China’s economic performance and its policy response. Australian commodity prices and AUD can lift sharply if the Chinese government significantly increases its infrastructure investment later this year. For now, signs of stabilisation in China’s economy may help to cap the downside in AUD," says Kong.

The Chinese-inspired boost to the Aussie Dollar follows a positive response to Thursday's news that 64.9K Australians entered employment in August, a figure that far exceeds the 23K the market was expecting and provides the kind of positive surprise that can have an impact on currency markets.

Above: AUD has appreciated against all its G10 peers when screened over a one-month timeframe.

Furthermore, the number who have entered the labour force rose, taking the country's participation rate to a record high 67%, exceeding the 66.7% the market was expecting. The head of the ABS, Bjorn Jarvis said this reflects a tight labour market.

The unemployment rate remained steady at 3.7%, anchoring it near historical lows.

The impact on the Australian Dollar was clear with the currency outperforming all its G10 peers as the rebound that has taken place over the course of the past month extended.

The robust data "should play into the RBA's hands. Another rate hike in November is now not all that unlikely, should the labour market remain tight and inflation continues to stay above target," says Michael Pfister, an economist at Commerzbank.