Market update: lackluster Chinese growth complicates the Aussie dollar outlook

China’s economy grew by a modest 1% quarter-on-quarter (QoQ) in the three-month period between October and December, and rose 5.2% when compared to Q4 of last year, to end 2023 having achieved growth of 5.2% - meeting the conservative target set by Chinese officials. A similar target is anticipated for 2024 as challenges around deflation, weak demand and an ailing property sector continue to weigh on the world’s second largest economy.

The prospect of further policy easing becomes more and more likely but any changes to the interest rate could see the yuan depreciate even further than what we have seen playing out in January thus far.

SSE composite index sell-off surpasses prior low with little chance of reversing fortunes

The Chinese index sold off on Wednesday amid the disappointing growth data, likely charting a new path to the downside. Looking at the weekly chart, price action fell beyond the major low of April 2022, with the March 2020 low next insight. The Chinese economy has been plagued by the deteriorating property sector, worsening aggregate demand and deflation.
it is now widely believed that Chinese officials will have to come to the rescue and provide sufficient stimulus to support the Chinese economy in 2024.

However, cutting interest rates will leave the local currency vulnerable after already depreciating against the dollar since the turn of the new year. Policy setters may also consider adjusting banks’ reserve ratio requirements but ultimately the market appears dissatisfied with existing stimulatory efforts.

SSE composite index weekly chart

High ‘beta’ Australian dollar appears vulnerable amidst a general decline in global indices

The Australian dollar, not too long ago, was propped up by two factors, which have subsequently reversed. The first was the increasing expectation around Fed rate cuts in 2024, and the second was the lingering threat of rising Australian inflation at a time when other countries had already seen massive improvement on this front.

Fast forward to today and stubborn inflation in the EU, US and UK, particularly in December, has caused a general repricing in bond markets as expectations around the timing of interest rate cuts have been pared back. With rate cut expectations easing, the US dollar has picked up a bid in recent trading sessions forcing AUD/USD to break beneath the ascending trend line - which has been acting as support - as well as the 0.6580 level.

There can be little doubt that today's Chinese growth data played a part in the continued selling, which has now breached the 200-day simple moving average, on the cusp of oversold territory. The challenge here is to assess whether the majority of this move has already played out; and given the fact that we are nearing oversold territory, it may be more prudent to monitor a potential pullback from such overheated levels before considering bearish continuation plays.

Nevertheless, the ‘high beta’, procyclical Australian dollar reveals further vulnerability by virtue of its relationship with the S&P 500 - as it tends to rise and fall in a similar fashion. Major equity indices have turned lower recently while the S&P 500 holds up well. Keep in mind rising geopolitical uncertainty, a stronger dollar and a recent rise in US yields does pose somewhat of a headwind for the index ahead of the mega-cap US earnings which is set to get underway next week.

AUD/USD daily chart

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