China’s Consumer Price Index (CPI) rose by 0.8% in December compared to a year ago, which is below the expected 0.9%. The CPI also increased by 0.2% from the previous month, after a decline of 0.1%. The Producer Price Index (PPI) in China dropped by 1.9% year-on-year in December, which is an improvement over the anticipated 2.0% decrease. The AUD/USD currency pair is slightly lower at 0.6690, reflecting the mixed inflation data from China.

Impact on the Australian Dollar

Australia’s economy depends heavily on China, its largest trading partner. When China’s economy grows, demand for Australian exports increases, boosting the value of the Australian Dollar (AUD). Conversely, slower growth in China can weaken the AUD. Iron Ore, a major export to China, significantly influences the AUD. When Iron Ore prices rise, it usually strengthens the AUD and improves Australia’s Trade Balance. On the other hand, falling prices can weaken the currency due to reduced demand. Australia’s Trade Balance, which compares earnings from exports to costs of imports, also affects the AUD’s value. A positive balance can strengthen the AUD as international buyers show more interest in Australian goods. China’s recent inflation data for December 2025 presents a mixed and unexciting outlook. The consumer price increase of 0.8% shows that domestic demand continues to lag as we enter the new year. Although Producer Prices slightly exceeded expectations, they remain in deflation, limiting hopes for a strong recovery. This report underlines the ongoing struggles of China’s economy throughout 2025, despite attempts to stimulate growth. Official data shows last year’s GDP growth was around 4.5%, falling short of the government’s target of 5%. This sustained weakness suggests that any positive news in the coming weeks may be temporary.

Iron Ore Prices and the Reserve Bank of Australia

China’s weak economic performance has directly affected iron ore prices, which are vital for the Australian dollar. Prices fell from over $130 per tonne in early 2025 to below $100 by the end of the year. This ongoing pressure on Australia’s main export will likely continue to weigh on the currency. Given this situation, we turn our attention to the Reserve Bank of Australia (RBA), which now finds itself in a tough spot. With Australian inflation cooling to 3.5% in the last quarter of 2025, expectations for rate cuts later this year are rising. Any hints from the RBA indicating a more relaxed approach could further weaken the AUD. Under these conditions, we anticipate that the AUD/USD will likely trend downward. Traders may want to consider short positions or buying put options to take advantage of potential declines toward the 0.6500 level. This strategy allows traders to respond to the challenges of a struggling Chinese economy and a possibly more dovish RBA. Create your live VT Markets account and start trading now.

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