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Aussie Remains ‘Strong’ Despite China Equities Free Fall

CHINA
  • One interesting development in recent weeks has been the significant divergence between Chinese equities, which keep constantly testing new lows amid Covid uncertainty and renewed crackdown fears, and ‘risk-pair’ AUDUSD, which has remained ‘strong’ despite surging price volatility.
  • As China has been historically been one of the engines of Australia’s GDP growth and investment, the two times series have shown strong relationship in recent years (until recently).
  • The H2 2021 AUD weakness has also been partly driven by the delay in policy normalization by the BA due to the renewed lockdown policies imposed by the government to stop the Delta variant crisis.
  • The RBA left it policy unchanged at its March meeting (at 0.1%), in line with expectations; a hike this year remains ‘plausible’ according to Governor Lowe but the uncertainty remains elevated.
  • However, this year’s Aussie strength has been partly attributed to the firm trend in commodity prices (AUD is also known as a commodity currency).
  • Hence, investors have been questioning if the divergence can persist in the medium term as Chinese growth expectations keep being revised to the downside.

Source: Bloomberg/MNI

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