Why the Aussie dollar is grabbing attention

All minds are on the grinding gears of China’s economy, but for Australia, the destiny of its largest trade partner is a specific headache. Investors are examining the latest market and production numbers to ascertain the condition of the world’s second-largest economy.

The Aussie dollar, generally understood as a surrogate for Chinese expansion, bounced this month on expectations of a trade deal between Washington and Beijing, and as China proceeded to shore up its economy with stimulus measures. January’s 2.2 percent rise in the Aussie is modest contrasted with the 10 percent fall in 2018 that left it as the worst performing G10 currency against the dollar.

That leaves Australian markets as something of a litmus test for how two of the biggest economic trends since the financial crisis, the growing consequence of China and the aggregation of debt by western economies, play out in 2019. The key challenge for investors is whether the rebound so far this year in the Aussie can last, or whether the currency will be pressed further by a China slowdown.

The Royal Bank of Australia (RBA) has also long lamented its wobbly property market, asking banks to boost capital to swallow losses. But if banks do not have the capital to handle a housing shock, the RBA might have to moderate monetary conditions and cut interest rates, in a blow to the currency. Yet growth is already exhibiting symptoms of slowing. The Australian economy slowed in the three months to the end of September, growing 0.3 percent over the preceding quarter.

Weakness in consumer spending was the principal offender, dragging annual growth down from 3.4 percent to 2.8 percent in the period. That leaves the economy reliant on momentum from China where manifestations of a marked slowdown have been surfacing in recent months. China reported in mid-January a surprise fall in exports for December, marking the biggest drop in two years. Any lapse in demand for commodities casts a gloom over resource-rich Australia. That, coupled with increasing caution from the US Federal Reserve, robbing the US dollar of some momentum, is why some are anticipating a potential rebound for the Aussie.