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Greg Gibbs, analyst at Amplifying Global FX Capital, suggests that the AUD has closely followed the Chinese equity market and appeared to act increasingly as a proxy for confidence in the Chinese economy over the last year or so.  

Key Quotes

“The rebound in Chinese equities has helped stabilise the AUD, but the currency has significantly lagged the rebound in Chinese equities this year, along with copper and other indicators of global risk appetite.”

“The AUD has underperformed most peers in Asia and other commodity currencies, which appears to reflect hand-wringing over the Australian housing market, resulting in the RBA moving from a soft tightening bias to a neutral bias in its February policy statements.   The local rates market has extrapolated the shift in RBA tone to price-in a significant risk of rate cuts over the coming year.”

“It remains to be seen if the RBA will cut rates, or indeed if some further policy easing succeeds in further weakening the AUD if global risk appetite recovers further from its recent lows.   From where we sit, it appears that the AUD has factored in heightened concerns over the weaker housing market and the risk that it spills over to the broader economy.”

“The weaker housing market certainly makes the Australian economy more vulnerable to external shocks that might arise from the trade dispute or a debt crisis in China, but the recent evidence suggests that these risks have eased for the time being.   As such, we see scope for the AUD to recover some of its recent underperformance of other Asian and commodity currencies, and indeed global equities and commodity prices.”