Australian Dollar Hit by Fresh Chinese Disappointment

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The Australian Dollar was broadly lower following weak Chinese retail sales data.

A soft run for the Aussie extended through Tuesday after investors reacted to news of weak consumption data from China, which served up another reminder of China’s macro imbalances.

It also reminds us that the Australian Dollar remains weighed down by developments in its largest trading partner, with the currency now down against all G10 peers over the course of the past month.

The NBS said Chinese industrial production remained steady at +5.4% y/y, matching expectations, but there was another underwhelming retail sales report, where a fall to 3.0% y/y in November from 4.8% in October was reported.

The consensus had anticipated a rise to 5.0%.

"Momentum from last month’s stronger Golden week driven activity was unlikely to last given weak consumer confidence. A sustained improvement in consumption hinges on the outlook for property," says Sam Hill, Head of Market Insights at Lloyds Bank.

China reported that home price declines slowed in November, with new homes reported at -6.1% y/y from -6.2% previously, while used home price deflation eased to -8.5% from -8.9%.

However, Hill points out that activity has only picked up in tier-one cities, where overcapacity is less of an issue.

"There remains a huge overhang of unsold homes (estimated at 60-80mn, around 8-10 years of sales) across the country and while property investment is falling, building is still in excess of what the economy needs. Price declines will always run into pockets of interest on the way down, but until supply and demand find some form of equilibrium the market won’t find an enduring base," says Hill.

Above: AUD has fallen against all G10 peers over the past month.

AUD weakness comes on the day Westpac reports its measure of Australian consumer confidence fell 2% month-on-month to 92.8pts in December, suggesting that consumer mood remains pessimistic.

"Elevated domestic interest rates, combined with global outlook concerns, have weighed on consumer confidence. Financial markets appear to have interpreted this week's announcement of two new RBA members as supportive of interest rate cuts. Market pricing for a February RBA cut has edged up to around 57%, from 50% yesterday," says Joseph Capurso, an analyst at Commonwealth Bank of Australia.

Commonwealth Bank says the Aussie Dollar faces a difficult 2025 as the U.S. raises trade tariffs on China and the Aussie economy starts to slow, which should encourage the RBA to cut interest rates early in 2025.

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That said, any significant stimulus from Chinese authorities that lifts domestic sentiment and global investor sentiment would boost China proxies, such as the Australian Dollar.

CBA thinks that the downside in the currency's value will have its limits on credible stimulus measures.

"The readout from last week’s Central Economic Work Conference indicated boosting investment (and consumption) would be a policy priority in 2025. Additional Chinese stimulus, especially on infrastructure and property investment, will help cushion the fall in AUD/USD next year in our view," says Capurso.