China’s retail sales rose 0.2% year on year in April, below the 2.0% forecast and down from 1.7% in March. Industrial production increased 4.1% year on year, missing the 5.9% forecast and easing from 5.7% previously.
Fixed asset investment fell -1.6% year to date year on year in April, compared with an expected rise of 1.6%. The March figure was a 1.7% increase.
After the data release, AUD/USD was 0.33% lower on the day at 0.7125. The Australian dollar is often linked to Chinese economic conditions.
Key drivers for the Australian dollar include Reserve Bank of Australia interest rates, iron ore prices, China’s economic performance, inflation, growth and the trade balance. Broader risk appetite in markets can also affect the currency.
The RBA targets inflation of 2–3% by adjusting interest rates and can use quantitative easing or tightening to change credit conditions. Higher rates tend to support the AUD, while lower rates tend to weigh on it.
Iron ore is Australia’s largest export, worth $118 billion a year based on 2021 data, with China the main destination. Rising ore prices and a stronger trade balance can support the AUD, while falls can weaken it.
Looking back at the data from April 2025, we saw how surprisingly weak Chinese figures on retail sales and industrial production could immediately weaken the Australian dollar. This established a clear cause-and-effect for traders, where bad news from China translated directly into selling pressure on the AUD/USD. The response was swift, as the currency is a well-known proxy for the health of the Chinese economy.
The situation today in May 2026 is noticeably different, and this should guide our strategy. China’s latest retail sales data for April 2026 showed a 3.7% year-over-year increase, beating expectations and signaling that domestic demand is stabilizing after a difficult period. This provides a much stronger floor for the Aussie dollar than the negative shock we experienced last year.
Furthermore, the Reserve Bank of Australia has signaled it is in no rush to cut interest rates from their current level of 4.35%, citing persistent domestic inflation that remains above their target band. This contrasts with other central banks that have started easing cycles, making the Aussie dollar more attractive for carry trades. This policy divergence offers underlying support for the currency.
Iron ore prices, a critical driver for the AUD, are also holding firm, trading recently around $117 per tonne. This stability is supported by targeted stimulus from Beijing aimed at its property sector, ensuring steady demand for Australia’s biggest export. Unlike last year’s uncertainty, the current commodity price environment is a positive factor.
Given the stabilizing Chinese data and the hawkish stance of the RBA, downside risks for the AUD/USD appear limited in the coming weeks. A suitable strategy would be to sell out-of-the-money AUD/USD put options with expiries in late June or July. This approach allows us to collect premium by taking the view that the pair will not break significantly lower from its current range around 0.6600.
