Australian Dollar Strengthens As China Announces Stimulus

Australian Dollar Strengthens As China Announces Stimulus
October 9, 2018

 

A stronger greenback and a weakening Chinese economy are the main factors that led to poor performance of the Australian dollar in the previous few months. However, yesterday, the Australian Dollar gained ground after the People’s Bank of China (PBOC) announced a fresh stimulus to boost its domestic financial system.

With the domestic economy moving forward at a steady pace while the Reserve Bank of Australia remains firm on its interest rate and growth outlook, the Aussie currency has taken cues from developments abroad.

 

China announces stimulus

The Antipodean currency is strengthening because China, which is Australia’s largest trading partner, has initiated schemes to stimulate its local economy through the central bank.

Yesterday, the People’s Bank of China slashed the reserve ratio requirement for several large commercial banks by 1%, expecting an increase in lending by commercial banks to businesses.  The decision is expected to unlock nearly 750 billion CNY (~£82 billion) for fresh lending to the real economy while offering a lifeline to struggling banks.

China’s commerce ministry has selected six cities for a special trade program in which exporters are absolved from a value-added tax of 16%. Total tax cuts for the year are expected to be more than 1.3 trillion yuan.

Australia’s Dollar mainly derives its strength from the huge commodity trade with China. Therefore, the currency is sensitive to fluctuations in sentiment toward China as well as variations in raw materials prices, which are greatly influenced by global growth outlook.

While announcing a cut in the reserve requirement ratio by 1% point, PBOC stated that it would not lead to “depreciation pressure” on the currency. However, contrary to the statement, the yuan fell 0.9% yesterday. Analysts project further depreciation in the value of the renminbi.

Rob Subbaraman, head of global EM economics at Nomura, said: “China could potentially have a very big impact on emerging markets. The negative side is if China eases monetary policy more, with further reserve cuts encouraging banks to lend — the effect is a weakening of the renminbi against the dollar.”

Following the rate cut, the International Monetary Fund has slashed its 2019 China growth view to 6.2% from 6.4% issued earlier. The IMF, however, maintained the growth estimate at 6.6% for this year.

Commenting on the rate cut, Viraj Patel, an FX strategist at ING Group, said: “The spillover effect to other CNY-sensitive currencies has been fairly limited. We usually view the AUD as a litmus test here, and the currency is trading fairly neutral this morning. The stock market rout may keep high-beta FX under pressure.”

The Aussie is strengthening based on the assumption that the Chinese stimulus will indirectly propel exports from Australia, which may hold true to a certain extent. Still, analysts are warning that the Antipodean currency will soon face pressure. Based on the details presented above, the Australian dollar is expected to move up against the greenback in the short-term.

Technically, the AUDUSD pair is trading near its major support at 0.7050. Additionally, the stochastic oscillator is in the oversold region. As a result, we can expect the Aussie to rally in the days to come.

aud - technical analysis - 9th October 2018

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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