The Australian dollar, which has been under pressure from global growth concerns and higher US yields, may see some relief in the coming weeks as China plans to boost its economy and the Reserve Bank of Australia (RBA) signals another rate hike by the end of the year.
China’s Stimulus Measures to Support Aussie Dollar
China, the largest export market for Australia, has been facing a slowdown in its economic activity due to the impact of the coronavirus pandemic, regulatory crackdowns, and power shortages. This has weighed on the demand for Australian commodities such as iron ore, coal, and gas, and dragged the Aussie dollar to a 10-month low of 63.57 US cents last week.
However, analysts expect China to take more direct stimulus measures in the fourth quarter to achieve its 5% growth target, which would improve the risk sentiment and support the Australian dollar. China has already announced a cut in its reserve requirement ratio for banks and an increase in its local government bond quota to boost lending and infrastructure spending.
According to a Bloomberg survey of strategists and economists, the Aussie dollar is forecast to end the year at 66 US cents and reach 68 US cents by March 2022.
RBA Rate Hike Prospects to Lift Aussie Dollar
Another factor that could lift the Aussie dollar is the prospect of another rate hike by the RBA, which kept its cash rate unchanged at 4.1% in its September meeting. The RBA also maintained its plan to taper its bond purchases from $5 billion to $4 billion a week from November, despite the lockdowns in New South Wales and Victoria.
The RBA said that it expects the economy to bounce back once the vaccination rates reach 70% to 80% and the restrictions are eased. The central bank also noted that the labor market remains strong, with the unemployment rate falling to a 40-year low of 3.7% in July and wage growth picking up.
A separate Bloomberg survey showed that most economists expect the RBA to raise its cash rate by another 25 basis points to 4.35% by December, which would make it one of the most hawkish central banks among advanced economies. This would increase the interest rate differential between Australia and other countries, and attract more capital inflows into the Aussie dollar.
Key Data to Watch Next Week
The Aussie dollar may face some volatility next week as investors await some key economic data from Australia and China. On Tuesday, Australia will release its consumer and business confidence surveys for September, which may show some deterioration due to the lockdowns. On Wednesday, New Zealand will report its retail card spending data for August, which may also reflect the impact of the virus restrictions.
On Thursday, Australia will publish its employment change and unemployment rate data for August, which are expected to show a decline in jobs and a rise in joblessness due to the lockdowns. A worse-than-expected outcome could dampen the expectations of another RBA rate hike and put pressure on the Aussie dollar.
On Friday, China will release its retail sales, industrial production, and fixed asset investment data for August, which are expected to show a moderation in growth due to the virus outbreaks and regulatory curbs. A weaker-than-expected result could raise concerns about China’s economic outlook and weigh on the Aussie dollar.