Australian Dollar: China's "Messaging Flop" and RBA Weigh

Above: Xu Shaoshi, Chairman of the NDRC.

The Australian Dollar is under pressure as markets show disappointment that a Chinese fiscal stimulus has not materialised and a change in tone at the Reserve Bank of Australia's communications.

Tuesday was supposed to be a 'big bang' moment for Chinese-linked assets as authorities announced a package of spending and investment initiatives that would complement already-announced monetary stimulus.

Instead, officials in the National Development and Reform Commission (NDRC), the country’s economic planning agency, only committed to speeding up spending and reiterating plans to boost investment and increase direct support for low-income groups and new graduates.

"AUD/USD fell by more than 50pips because there wasn’t any meaningful additional fiscal stimulus announced by Chinese authorities today," says Kristina Clifton, a market strategist at Commonwealth Bank of Australia.

The big fiscal input was the last piece of a package being put together by authorities to create a convincing package of measures that would boost growth an ensure the official growth target is achieved.

When it became clear this was something of a damp squib, Chinese stocks rapidly erased and then reversed significant gains that were being built ahead of the announcement.

The Chinese-linked Australian Dollar came under pressure too: the Pound to Australiab Dollar exchange rate rallied half a per cent to 1.9462, the Australian Dollar fell 0.45% on the day to 0.6726.

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The price action shows AUD's recent run of outperformance was highly reliant on expectations for China to juice its economy.

The disappointment will now call into question that run of outperformance and leave pairs like GBP/AUD looking better protected on the downside.

"We reckon it was a messaging flop from NDRC's top officials and doubts on China's policymakers' resolve to boost the economy will start to re-emerge again," says a note from TD Securities.

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The NDRC said China would continue to issue ultra-long sovereign bonds next year to support major projects and bring forward a 100BN yuan ($14BN) investment in key strategic areas originally budgeted for 2025 to this year.

"We are fully confident in achieving the annual economic and social development targets," said Zheng Shanjie, Chairman of the NDRC.

The disappointment with the Chinese stimulus came on the same day the Reserve Bank of Australia (RBA) took a small yet meaningful step towards lowering interest rates.

The minutes from the RBA's September policy decision removed a commitment that "it was unlikely that the cash rate target would be reduced in the short term".

Economists at CBA say this is consistent with their belief the central bank will cut interest rates for the first time in December.

The AUD has been held aloft amidst expectations that the RBA would be the last of the major central banks to cut interest rates (BoJ aside) owing to the low starting point of interest rates and still-high inflation.

However, the RBA looks as though it doesn't want to wait too long and thinks leaving the job until 2025 would be unwise.

The bringing forward of rate cut expectations would naturally weigh on Aussie bond yields and the Aussie Dollar.