AUD tumbles as Chinese economic outlook sours

Daily Currency Update

The Australian dollar retraced recent gains through trade on Monday following a surprise Peoples Bank of China (PBOC) monetary policy adjustment and softer than anticipated activity data. Having traded above US$0.71 leading into last week's close the AUD came under heavy selling pressure after the PBOC announced a 10 basis point reduction in its medium term lending facility and key activity indicators printed short of expectations. Chinese industrial production, consumer retails sales and key investment indicators were much weaker than anticipated in July, disappointing investors expecting a post lockdown upturn. Softness in the Chinese property market and an emerging liquidity trap continue to drag on the economy and highlight a souring in the Chinese economic outlook. The US dollar advanced more than 1% against the yuan while the AUD, often seen as a proxy to yuan performance tumbled toward intraday lows near US$0.7020. The sour Chinese macro outlook served to remind markets of the challenges facing the broader global economy. A sustained flow of negative macro news will likely weigh on the AUD through the months ahead, generating headwinds that counter any USD weakness.

We now turn our attention to the RBA policy meeting minutes, where we dissect policymakers decision making for any clues as to the pace of future rate hikes.