Monthly Wrap: AUD – Australian dollar wavers as China scraps Covid restrictions

Key takeaways:

• Australian dollar fluctuates as China eases ‘zero Covid’ restrictions.
• RBA rate hikes provides fleeting gains.
• AUD Monthly lows: £0.54, $0.65, €0.62, NZ$1.04, C$0.88
• AUD Monthly highs: £0.56, $0.68, €0.65, NZ$1.08, C$0.93

Trade in the Australian dollar has been mixed over the past month, with Chinese Covid developments prompting some swings in AUD sentiment.

The beginning of December brought some good news for the ‘Aussie’ as Chinese officials announced that the country would begin to unwind its strict ‘zero Covid’ policies. It’s hoped the unwinding of restrictions would be a boon for Australian exports.

The Bank of Australia’s (RBA) December interest rate decision also helped AUD to climb higher in the first week of December. The central bank hiked rates as forecast alongside hawkish forward guidance.

However these gains proved fleeting. The ‘Aussie’ began to weaken again as the easing of China’s Covid restrictions saw a surge in new infections, stoking fears Beijing could reverse its reopening plans.

A dip in Chinese inflation also weighed on the Australian dollar. Inflation continued to fall sharply in November prompting concerns that the world’s second-largest economy is as risk of deflation.

Shifting risk appetite also weighed on the currency as the month went on however. Signals from the Federal Reserve that US interest rates will peak at a higher level than previously forecast stoked global recession fears.

Upbeat Australian jobs data tempered losses for the ‘Aussie’, however. November’s unemployment remained unchanged at a record-low 3.4%, alongside an above-forecast leap in employment figures.

Looking ahead to January, Chinese inflation figures could add to deflation worries if they remain close to November’s lows. If the data prints as forecast, it could see AUD slip.

On the other hand, the latest raft of Australian jobs data could see the Australian dollar recover some lost ground. December’s unemployment is forecast to remain unchanged in at 3.4%.

Fourth quarter Australian CPI figures could push AUD higher if inflation ticks higher as forecast. The hot inflation figures could prompt additional market bets on RBA rate hikes.