Chinese Stock Rescue Could Boost Australian Dollar: Soc Gen

"Can China’s stock market rescue package support the AUD?" - Soc Gen.

A rescue of Chinese stocks could also rescue the Australian Dollar from its dour 2024 performance, according to Société Générale's lead FX analyst.

Soc Gen's Kit Juckes says the Australian dollar has tracked Chinese equities over the past few years until a major break in the final quarter of 2023.

It was at this point that a fall in U.S. bond yields hurt the U.S. dollar, which "fell in a pro-carry environment that benefited AUD/USD despite the slide in Asian stocks," says Juckes.

However, Juckes notes 2024 is proving more challenging for the Australian Dollar, which has declined once more in line with falling Asian equity markets.

Aussie weakness has seen the Australian to U.S. Dollar exchange rate decline 2.80% to 0.6618, and the Pound to Australian Dollar exchange rate rise 3.27% to 1.9255.

This brings us to perhaps the most significant market event of the week: an apparent desire by Chinese authorities to intervene and support faltering stocks.

Chinese Premier Li Qiang, one of President Xi’s closest allies, has asked authorities to draw up more “forceful” measures to halt sliding share prices and improve investor sentiment. The moves by Chinese authorities come after China's benchmark CSI 300 Index lost a fifth of its value in the last nine months and hit its lowest level since the start of 2019 on Monday.

The news helped Chinese equities recover and saw the Aussie Dollar put in its best performance of the year so far, although there is a great deal more to be done if the losses of the past three weeks are to be overturned.

On Wednesday, the People's Bank of China said it will implement a 50bp RRR cut on February 5, taking the rate to 10%, in the process releasing around RMB1 trillion of long-term liquidity.

"China equities hit 5-year lows even as US stocks printed record highs. China's reported package to bolster its equity market plus a RRR cut should add background support to the Aussie," says Sean Callow, a foreign exchange strategist at Westpac.

The bank will also lower re-lending and rediscount rates by 25bp for bank lending to agriculture and small businesses and promote the steady decline of "comprehensive social financing costs".

The state-owned Securities Daily meanwhile reported that the country’s medium- to long-term investment funds, including the $406 billion National Social Security Fund and some state-owned insurance giants, are expected to buy shares to bolster the stock markets.

Authorities also committed to opening the country's $64 trillion financial industry to international investors.

"The Chinese authorities have just delivered a major rescue package to the stock market. If it succeeds in restoring investors' confidence, Chinese stocks could eventually rescue the Australian dollar," says Juckes.