Monthly Wrap: AUD – Australian Dollar bolstered by signs of Chinese recovery

Key takeaways:

• Leap in inflation points to further RBA rate hikes.
• Chinese economy shows signs of positive recovery.
• AUD monthly highs: £0.57, $0.71, €0.65, NZ$1.09, C$0.94
• AUD monthly lows: £0.56, $0.66, €0.63, NZ$1.07, C$0.91

The Australian dollar was muted as 2022 came to a close, holiday-thinned trade and a surge in Chinese Covid cases limited demand for the ‘Aussie’.

AUD exchange rates then fluctuated at the start of 2023. Signs of a downturn in the Chinese economy initially weighed on AUD sentiment, before the ‘Aussie’ rebounded as fading Federal Reserve rate hike bets buoyed market risk appetite.

Strong retail sales figures helped the Australian dollar extend its recovery through the first half of January, while China’s consumer price index also bolstered AUD. Chinese inflation rose to 1.8% last month which helped to reduce fears of stagflation in the world’s second-largest economy. 

More upbeat data from China reinforced the ‘Aussie’s gains through the middle of January. China’s industrial sector saw a strong recovery in December alongside better-than-expected retail sales.

On the other hand, a sharp slowdown in China’s fourth quarter economic growth kept pressure on the Australian dollar. Cooler Q4 figures caused Chinese growth in 2022 to be one of the worst on record.

Fluctuating expectations for future interest rate hikes from the Reserve Bank of Australia (RBA) then infused volatility into AUD exchange rates in the second half of January.

A weaker-than-expected domestic jobs report initially dented RBA rate hike bets and undermined the ‘Aussie’.

The subsequent release of Australia’s fourth quarter CPI figures then revived RBA rate hike expectations and AUD exchange rates, as domestic inflation soared to a 32-year high.

Looking ahead, the RBA’s February interest rate decision could bolster AUD if they raise rates and signal plans to continue tightening monetary policy in the coming months.

A further forecast rise in Chinese inflation could also provide support to the Australian dollar. Markets will be hoping that the 2% increase will erase deflation fears.