China’s Slowdown Clouds Aussie Dollar’s Future | Errante
Market Overview
The Australian Dollar (AUD) is currently dealing with significant challenges. Its value has come under pressure due to a mix of domestic issues and global factors. Earlier in January, the AUD managed to climb above 0.6300, reaching a high for the year. However, since then, it has lost ground. The slowdown in China, Australia’s biggest trade partner, and expectations of interest rate cuts by the Reserve Bank of Australia (RBA) have made the outlook for the AUD increasingly uncertain.
Adding to these problems is weak economic data from China released in January. The NBS Manufacturing PMI fell to 49.1, indicating contraction, while the Non-Manufacturing PMI only managed to stay slightly in the growth zone at 50.2. These signs of a stalling recovery in China further weigh on Australian economic prospects, given the close ties between the two economies.
Fundamental Factors
Two main reasons explain the Australian Dollar’s current struggles: softer inflation in Australia and lower demand for exports from China.
On the inflation front, Australia’s Q4 numbers showed clear signs of easing price pressures. Headline inflation rose by 2.5% Year-on-Year (YoY), which was within expectations. However, the trimmed mean CPI, which the RBA pays close attention to, dropped to a three-year low of 3.2%. This fell short of the RBA’s forecast of 3.4% and has strengthened market expectations for a 25 basis point rate cut at the RBA’s February meeting. Markets now also predict further rate reductions throughout the year, totaling 85 basis points by the end of 2025.
Externally, China’s economic slowdown is another major factor. The country’s reduced demand for Australian exports, especially iron ore and copper, is hitting the AUD hard. While iron ore prices have stayed relatively steady, copper prices have recently dropped, signaling declining confidence in global economic demand.
Technical Analysis
AUD/USD is preparing for two inside bar setups: the first on the weekly chart and the second on the daily chart. As discussed in our previous analysis, AUD/USD experienced a liquidity grab from the highs above the 200 MA with a bearish order block, breaking below the 50 MA with a gap candle. The downward pressure persisted. Currently, the market is stalling at the order block from January 3, 2025, which acts as support and coincides with the 61% Fibonacci level of the bullish leg. A break of this support may lead the pair to the bullish order block from January 10, 2025.
Conclusion
The Australian Dollar is facing a tough period, and things don’t look like they will improve soon. RBA’s likely rate cuts and China’s sluggish recovery are keeping the pressure on the AUD, while the US Federal Reserve’s hawkish stance supports a strong US Dollar. For now, the road ahead for the Australian Dollar remains challenging.
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