Australian Dollar Reacts to Chinese Stimulus Disappointment

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The Aussie Dollar fell ahead of the weekend as investors expressed disappointment towards China's latest stimulus package.

We have been waiting weeks for the National People’s Congress (NPC) to unleash a package aimed at bolstering the Chinese economy, which would, in turn, bolster the prospects of China-linked assets, such as Australia's Dollar.

The NPC timed its decision to follow the U.S. election result, with investors thinking a bigger support package would be unleashed in response to a 'red sweep'.

Instead, all we got was a 10 trillion yuan debt-swap programme that would sterilise hidden debts over the next five years.

"The initial market reaction was disappointment, with crude oil, copper and iron ore prices as well as A50 futures falling," says Duncan Wrigley, Chief China Economist at Pantheon Macroeconomics.

This is a basket of assets to which AUD is closely correlated.

"Investors had been hoping for a large-scale stimulus involving consumption-promotion measures. This isn’t a measure to provide a sudden big boost to domestic demand, but rather seeks to tackle structural issues, thereby enabling local governments to ramp up spending gradually over several years," adds Wrigley.

The GBP/AUD exchange rate is 0.40% higher on the day at 1.9518, with gains going some way to recovering some of its weekly loss. The EUR/AUD is 0.37% higher at 1.6232.

The AUD/USD exchange rate is down 0.62% at 0.6637.

The Aussie Dollar has appreciated in response to Trump's win. It was carried higher amid a near-euphoric equity market rise as investors expect significant tax cuts to boost the U.S. economy.

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There was one theory that the currency would be a big loser of a strong Turmp win, given his desire to hammer Chinese imports with tariffs. This would pose a headwind to China's economy and, by extension, Australia.

But market participants and Chinese authorities appear content to adopt a wait-and-see approach for now.

"Policymakers probably saw no need for a robust response to Trump’s victory before he takes office, given the relatively restrained post-election market response. Next year is a different matter, but officials will take that as it comes," says Wrigley.

The Australian Dollar will remain a proxy to Chinese sentiment, but until the incoming administration signals a confrontational approach to China, we think FX markets will instead focus on the equity rally.

This means AUD can continue to benefit from improved global investor sentiment.