Chinese Stimulus Does Little To Help Aussie Dollar

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Includes: FXA
by: Andrew Sachais

Summary

The Australian dollar continues to weaken against the U.S. currency.

Although China's central bank cut its benchmark rate, investors remain skeptical.

Weakening inflation and economic growth signal that China could remain under pressure for years to come.

The Australian dollar was little changed after China's central bank enacted a rate cut last week as weakening economic data in the world's second largest economy continues to weigh on investor sentiment. CurrencyShares Australian Dollar Trust (NYSE:FXA) has declined over 8% since September as fear over the Chinese economy mounted.

Australia's currency is heavily tied to the strength of the Chinese economy as Australia exports a large number of resources to China. When demand for resources grows in China, exports in Australia expand, thus leading to greater acceleration in the pace of economic growth for the island continent.

The People´s Bank of China cut its lending rate in November as an effort to stimulate growth, while attempting to end the downward spiral of economic data in the country. On Friday, the PBOC cut its benchmark lending rate by 40 bps to 5.6%, its first rate cut in more than two years, according to the chart below. In 2012, the central bank cut the benchmark rate by 31 bps to 6%, also seen in the chart.

Analysts believe the PBOC is truly nervous that economic growth could fall below the 7% annual target level, which could cause further stimulus measures by policymakers in the future.

"The People's Bank of China has shifted its focus toward broad-based stimulus and are open to more rate cuts, as well as a cut to the banking industry's reserve requirement ratio," according to a Reuters report.

Data provided by Trading Economics

One of the factors that fueled the Chinese rate cut was the broad decline in Chinese consumer prices the past few years. Chinese consumer prices came in at 1.6% annual growth for October, flat from the previous month's reading of 1.6%. Chinese consumer prices have fallen from over 6% in 2011, to under 2% currently, as is seen in the chart below.

For those that believe inflation closely tracks aggregate demand, this downward spiral bodes very poorly for the prospects of turning around the Chinese economy in the near future. Similarly, export data may be overstating the true health of the Chinese economy based on falling inflation, according to Business Insider.

"The data also suggests that export data, specifically the big uptick in exports to Hong Kong, are likely to be an invoicing effect rather than 'real' trade," explained a Business Insider report.

Data provided by Trading Economics

As investors fear the health of the Chinese economy may be overstated based on recent economic developments in the country, the Aussie dollar has suffered. Declining inflation, and economic growth led to a rate cut by the PBOC in November. Although the PBOC is making a concerted effort to strengthen the Chinese economy, the downward spiral looks to have taken hold, meaning selling pressure may remain on the Aussie dollar over the next year.

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