China Weakens and Goes into Stimulus Mode
Likely one of the main drivers of price action, in not only the Aussie but across most financial markets in 2015 was the weakening Chinese economic data, and the stimulus efforts from the Chinese government and central bank, People’s Bank of China. Again, China and Australia are big time trading partners (27% of total Australian exports are to China), so it makes sense that with the second largest economy in the world falling from “lofty” economic growth levels/expectations that Australia takes a hit to its own economy as well.
And the developments in China weren’t pretty. Continuing with weakening economic data that was first seen in 2014, we saw more stimulative actions (most notable are the interest rate cuts, starting in March with a surprise move to cut deposit & lending rates). These actions (along with limitations on selling equities & government buying support) likely set off the massive rally in Chinese stocks, which saw the Shanghai Composite rise to a staggering 60% gain in 2015 at its peak! We also saw modest gains in broad global risk sentiment, including AUD/USD moving up from .7600 in March to nearly reach .8200 in May.
Unfortunately, as the saying goes,”what goes up must come down” and the Shanghai Composite was no exception to the rule as it ran out of buyers in July. And when the government eased equity market restrictions and support in August, Chinese stocks crashed further, sparking fear, more PBOC action and risk-off flows in other markets like commodities and the Australian dollar. This is when we saw AUD/USD hits its 2015 lows just above the .6900 handle, and fortunately for Aussie bulls, it looks like it was the final selloff with China’s influence on the global markets through extreme fear and volatility waning.
Australian data & Reserve Bank of Australia Interest Rate Cuts
With so much going on in China in 2015, it’s easy to forget that Australia had its own catalysts for volatility this past year, although the ride was much, much less dramatic.
From the Land Down Under, economic data also continued on its trending path lower from 2014, sparking a downbeat assessment from the Reserve Bank of Australia (RBA) and an expected interest rate cut from 2.50% to 2.25% in February. From there, all was quiet from Governor Glenn Stevens and crew as they sat on their hands in March and April to see if there would be positive effects from the February cut.
And while there were positive signs through the first quarter of 2015 (improvements in the employment sector and housing market) the RBA remained bearish on the economy and cut rates one more time in May by another 0.25% to 2.00%. Apparently, because expectations were high of another rate cut, the Aussie actually rallied after the second rate cut on your typical “buy-the-rumor, sell-the-news” reaction scenario, but it was short lived due to the the global risk-off sentiment flows provoked by Chinese weakness.
Fortunately for Australia, the economic data since those rate cuts seems to have stabilized despite weakness from its largest trading partner China and with commodity prices falling huge, including iron ore and gold (around 10% of the world’s gold comes from Oz). Enough so that it looks like the RBA will close out 2015 on an upbeat note, citing “greenshoots” in the economy and setting the tone that interest rate cuts may be the thing of the past….for now…
What do you think? Will Australian data continue to improve? Will China stabilize? Are RBA rate cuts in the cards in 2016? Leave a comment below and vote in our poll of where you think AUD/USD will be by the end of 2016!