China’s Consumer Price Index (CPI) dropped by 0.3% year-over-year in September, improving from a 0.4% decline in August. Analysts had expected a smaller decrease of -0.1%. On a monthly basis, CPI inflation increased by 0.1%, which fell short of the expected 0.2%. The Producer Price Index (PPI) fell by 2.3% year-over-year in September, better than the 2.9% drop seen in August and in line with market forecasts. This information comes amid growing trade tensions between China and the U.S., which could affect various markets.

Impact On The Australian Dollar

As of the latest update, the AUD/USD pair increased by 0.25%, reaching 0.6502. The Australian Dollar showed strength against several major currencies, especially the New Zealand Dollar. Changes in China’s economy significantly affect the Australian Dollar due to strong trading ties, impacting Australia’s economic health. Key factors for the Australian Dollar include the Reserve Bank of Australia’s interest rates, iron ore prices, and the state of China’s economy. Australia’s trade balance also influences the currency’s value. Generally, a positive trade balance or rising iron ore prices strengthens the Australian Dollar, while a negative balance or falling prices can weaken it. The recent Chinese inflation data, showing a -0.3% drop year-over-year, serves as a warning. This unexpected deflation suggests that China’s weak domestic demand may be more persistent than anticipated. For investors, this hints that bearish strategies on assets linked to Chinese growth are becoming more appealing. The Australian dollar is particularly at risk due to its close economic connections with China. Recent trade data from August 2025 indicates a sharp 5% decline in exports to China, which significantly reduced the trade surplus. Hence, buying put options on the AUD/USD or taking short positions in AUD futures contracts might be wise strategies for anticipating further declines.

Commodity Market Effects

This economic weakness also affects key commodities, notably iron ore, which is Australia’s largest export. With China’s producer prices declining, industrial demand is weakening. Iron ore futures on the Dalian exchange have recently fallen below the critical $100 per tonne level for the first time since early 2025. This trend supports expectations for lower commodity prices in the upcoming weeks. Examining data from earlier months in 2025 shows this is not an isolated issue but part of a larger trend of slowing growth. China’s official GDP growth for Q3 2025 was reported at 4.2%, missing analysts’ expectations, while new home prices have decreased for five straight months. This ongoing economic slowdown suggests that a swift recovery is unlikely. In this context, the Reserve Bank of Australia may struggle to justify further interest rate increases, reducing the appeal of the AUD. Currently, interest rate swap markets predict only a 15% chance of another RBA hike by the end of 2025, a significant drop from over 50% a month ago. This discrepancy could lead to more downward pressure on the AUD/USD pair, especially compared to U.S. Federal Reserve policies. Create your live VT Markets account and start trading now.

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