Aussie Dollar Rallies on Chinese Easing Speculation

Published 01/10/2012, 12:09 PM
On Tuesday, the Australian dollar gained against the US dollar, continuing a trend that had been ongoing for two days.
 
The reason?
 
The move may have been prompted by data coming out from China.
 
On Monday, it was announced that Chinese policy makers had opted to officially back entrepreneurs by taking a more aggressive stance towards funneling money to Chinese businessmen who have might have been hit by China's recent economic slow down.
 
Then, on Tuesday, China's December imports rose at their slowest rate in more than two years. Although this seems bearish, traders may have interpreted the data as being positive—as it may be more likely that Chinese officials would ease monetary policy going forward. China's trade surplus has been continuing to shrink.
 
The shrinking trade surplus may be evidence that the Chinese yuan is fairly valued. Critics—particularly in the US—have accused China of manipulating its currency in such a way as to keep the yuan undervalued. Given the ongoing trend with China's trade surplus, Chinese officials may not be expected to weaken the yuan anytime soon. In fact, they may even depreciate the currency, in an effort to keep their economy growing.

How does this affect Australia?
 
Australia is a massive trading partner with China, and has been experiencing somewhat of an economic boom in recent years, as the country has seen extensive demand for its mineral exports to the Chinese market.
 
Australia's unemployment rate currently sits at just above 5%, far better than most Western economies.
 
If China's economy can continue growing, it could bode well for Australia and its currency. The Australian currency may be expected to strengthen as demand for its exports strengthens.

Inversely, if China shows weakness, the Aussie dollar could sell off. A contraction in China could crush demand for Australia's exports and thereby weaken the Australian dollar.
 
A similar phenomenon has been seen in other commodity-backed currencies such as the Canadian dollar. The Canadian dollar showed near-record strength last year when demand for Canada's material exports reached an all-time high.
 
Investors looking to trade the Australian dollar should keep a close eye on economic data coming out of China in the future.
 
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

By Sam Mattera

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