How Chinese Market is Shaping Australian Dollar Bearish Trend

The Australian dollar has recently emerged as one of the weakest performers among the G10 currencies, reflecting broader shifts in market sentiment that extend beyond Australia’s borders. A key driver behind this underperformance has been the disappointing updates from China’s National Development and Reform Commission (NDRC). Despite reaffirming their commitment to accelerate fiscal spending, the Chinese authorities’ announcements lacked the bold measures anticipated by the markets. This has resulted in a ripple effect across Asian and commodity-linked currencies, reinforcing the view that economic momentum in the region remains fragile.

AUDUSD H1

 Source: Finlogix ChartsChina's Fiscal Policy Updates and Their Implications

In its most recent update, the NDRC outlined several initiatives aimed at stabilizing China’s economic landscape, focusing primarily on fiscal injections and infrastructural support. The key components included:

Expedited Budget Allocations: The NDRC has pledged to accelerate the disbursement of CNY100 billion in public investment funds, originally earmarked for 2025, in a bid to front-load fiscal support.Broader Fund Utilization: Expanding the categories eligible to tap into special local bond issuances, opening access to sectors such as green technology and rural development.Stimulating Provincial Spending: Encouraging local governments to expedite the remaining issuance of CNY290 billion in special bonds by year-end.Support for Long-Term Projects: A plan for continued issuance of ultra-long sovereign bonds into 2024 to fund large-scale infrastructure projects.While these steps are indicative of Beijing’s intention to meet its 5% growth target for 2024, they fell short of the scale of fiscal expansion—rumoured to be up to CNY3 trillion—that many market participants were hoping for. This has kept broader sentiment muted, as structural challenges like high corporate debt and softening domestic demand suggest that these measures alone may not be sufficient to reinvigorate economic growth. The cautious market reaction is also a reminder of China’s complex balancing act between supporting short-term growth and avoiding long-term financial instability.

Australian Dollar Impacted by RBA’s Policy Shifts

Australian dollar has faced additional headwinds due to evolving domestic monetary policy. The Reserve Bank of Australia’s (RBA) September meeting minutes (I’ve made a blog on that topic and you can find it here: https://acy.com/en/market-news/market-analysis/rba-economic-outlook-and-monetary-policy-decisions-l-s-132207/) revealed a potential pivot towards a more dovish stance, dropping previous indications that further rate hikes were off the table. This shift has fuelled speculation that a rate reduction could occur before the end of the year, reflecting growing concerns over weaker domestic economic data and global uncertainties. Futures markets are now pricing in a nearly 50% probability of a 25-basis point cut by December, a stark reversal from the earlier tightening narrative.

This dovish tilt by the RBA has further weakened the AUD, exacerbating its sensitivity to external shocks, particularly given the currency’s traditional reliance on global risk appetite and commodity price dynamics. With China being Australia’s largest trading partner, the lacklustre fiscal response from Beijing only adds to the AUD’s vulnerability.

Emerging Market Currencies Face Renewed Pressure

Emerging market currencies have not been immune to the recent volatility. The resurgence of the U.S. dollar, driven by both geopolitical concerns and shifting expectations around U.S. monetary policy, has reversed some of the gains these currencies achieved earlier in the year. The currencies most affected include:

Thai Baht (THB): Down 4.2% against the USD this month, driven by weaker tourism inflows and rising political uncertainty.Malaysian Ringgit (MYR): Falling 3.8%, amid subdued commodity prices and fiscal constraints.Indonesian Rupiah (IDR): Declining 3.4%, pressured by higher U.S. Treasury yields and a growing current account deficit.Russian Ruble (RUB): Weakened by 3.3%, amid heightened geopolitical tensions and lower energy export revenues.In contrast, the Mexican peso (MXN) has bucked the trend, appreciating 2% over the past week. Its resilience is underpinned by robust economic fundamentals and relatively high interest rates, which continue to attract foreign capital despite global headwinds.

US Dollar Rallies on Geopolitical and Policy Shifts

The U.S. dollar’s recent strength can be attributed to a confluence of factors, including geopolitical uncertainties and evolving monetary policy expectations. Rising tensions in the Middle East have sparked fears of disruptions in global energy supplies, pushing Brent crude prices close to USD 80 per barrel. This has heightened risk aversion, leading investors to seek safety in the USD. Additionally, the upcoming U.S. presidential election adds another layer of uncertainty, making the dollar a favoured asset in times of heightened geopolitical risk.

From a policy perspective, a stronger-than-expected September nonfarm payroll report has prompted speculation that the Federal Reserve may slow its rate-cutting pace, with a smaller 25 basis point reduction anticipated following the elections. This has further bolstered the dollar’s upward trajectory, particularly against a backdrop of dovish signals from other major central banks, including the European Central Bank (ECB) and the Bank of England (BoE).

Pressures Mount on European and Central European Currencies

European currencies, too, have struggled under the weight of slowing growth and a soft inflation outlook. This has put pressure on regional central banks to consider additional monetary easing, which in turn has weighed on Central European currencies. The most notable impacts have been seen in:

Czech Koruna (CZK): The EUR/CZK pair has climbed above the 25.000 threshold, reflecting concerns over stagnating domestic demand and political uncertainty.Hungarian Forint (HUF): The EUR/HUF pair recently breached the 400.00 mark, as the central bank’s accommodative stance is expected to persist.Polish Zloty (PLN): EUR/PLN is now trading above 4.3000, with the pressure amplified by dovish comments from the governor of the National Bank of Poland (NBP), who signalled potential rate cuts as early as March.The outlook for these currencies remains challenging, particularly as the ECB contemplates a slower pace of policy normalization, which could prolong the relative weakness of the euro and its regional counterparts.

Looking Ahead

As we move forward, the interplay between fiscal policies, geopolitical developments, and central bank decisions will be pivotal in shaping the FX landscape. Key themes to watch include:

China’s Fiscal Strategy: Will Beijing opt for more aggressive stimulus if growth disappoints further?Federal Reserve Policy Path: How will upcoming data releases influence the Fed’s rate outlook?Geopolitical Tensions: Will the situation in the Middle East lead to prolonged risk aversion and higher energy prices?These factors will likely fuel further volatility across global currency markets, with a high potential for unexpected shifts as economic and political uncertainties evolve.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.