The Australian dollar drifts higher as China stimulus speculation intensifies

Cameron Spencer/Getty Images
  • The Australian dollar drifted higher against most of the major crosses on Tuesday.
  • Movements in the Chinese yuan remain highly influential on those in the Aussie.
  • The British pound is bouncing after Theresa May’s EU withdrawal agreement was voted down in the UK parliament.
  • The economic data calendar is quiet in Asia, leaving British politics and the Chinese yuan to dictate direction.

The Australian dollar drifted higher against most of the major crosses on Tuesday, benefiting from increased speculation over the prospect of for further Chinese economic stimulus.

Here’s the scoreboard at 8.10am in Sydney on Wednesday.

AUD/USD 0.7200 , 0.0005 , 0.07%
AUD/JPY 78.24 , 0.42 , 0.54%
AUD/CNH 4.8761 , 0.0109 , 0.22%
AUD/EUR 0.6309 , 0.0041 , 0.65%
AUD/GBP 0.5592 , 0 , 0.00%
AUD/NZD 1.0560 , 0.0018 , 0.17%
AUD/CAD 0.9557 , -0.0001 , -0.01%

After opening at .7195, the AUD/USD rose to as high as .7225 in early European trade before easing to as low as .7180 during the North American session, continuing to track the movements in the Chinese yuan which strengthened, then weakened, before lifting again towards the close.

Thomson ReutersAUD/USD (RHS, orange) v USD/CNH (LHS, inverted, purple) 5-Minute Chart.

The initial strengthening in the yuan — hence the Aussie — coincided with further signs that Chinese policymakers will roll out additional stimulus measures to support the economy.

“The People’s Bank of China (PBoC) indicated that the Chinese yuan exchange rate is no longer constraining the central bank’s reserve requirement ratio (RRR) cuts, implying that interest rate cuts could be in the policy toolkit if the economy deteriorates, and disclosed higher-than-market-expected loan growth in December,” said analysts at Credit Suisse.

“China Ministry of Finance (MoF) and National Development and Reform Commission (NDRC) confirmed the announcement of a value-added tax (VAT) cut at the March National People’s Congress and pledged to accelerate infrastructure investment.

“We think the weaker-than-expected December economic data has added a new sense of urgency in policymakers to rekindle growth. We expect a higher quota for local government special bond issuance, an 400-600 billion yuan VAT cut, more specific pro-consumption measures, and a further 300 basis point RRR cut.”

Further helping to support sentiment, Chinese loan growth in December exceeded market expectations, helping to bolster confidence that economic activity will stabilise.

“China Loan data showed both new yuan Loans and aggregate financing expanding by more than expected last month, new yuan loans by 1.08 trillion yuan and aggregate financing by 1.589 trillion yuan,” said Ray Attrill, Head of FX Strategy at the National Australia Bank.

Despite the upside beat, the yuan weakened late in the session despite the release of further soft US economic data during the session, dragging the Aussie dollar lower.

“The Empire manufacturing survey fell again to only 3.9 points, a little below average,” said Joseph Capurso, Senior Currency Strategist at the Commonwealth Bank.

Against the other major crosses, the Aussie gained against the Japanese yen, euro and British pound.

The lift against the yen reflected the improvement in investor risk appetite during the session while the euro was weighed down by dovish remarks from ECB President Mario Draghi.

“Draghi said the Eurozone economy was weaker than expected, and the weakness could last longer than expected,” Capurso said.

On what was an otherwise quiet session on Tuesday, the main area of excitement came from the British pound which gyrated wildly before and after the UK House of Common’s vote on Theresa May’s EU withdrawal agreement.

“The British pound came under pressure in front of the just completed vote on the Prime Minister’s Brexit withdrawal Agreement, which she has lost by a crushing 432 to 202 votes,” said Atrill at the NAB.

“Sterling is bouncing on this, on the view that the Labour opposition no confidence motion just tabled will be defeated today and that an extension of Article 50 and a possible second referendum are the singularly most likely ways forward from here. We’d agree.”

Turning to the day ahead, the economic data calendar is relatively quiet in Asia, leaving British politics and the Chinese yuan to drive overall market direction.

Of what data releases there are, the main highlights are the latest Westpac-MI Australian consumer sentiment report for January, Chinese new home prices for December, CPI from the UK, Italy and Germany along with trade prices, NAHB housing market index, and US crude oil stockpiles from the EIA in the United States.

The US Federal Reserve will also release its latest Beige Book on economic conditions.

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