Economic Links Between China and Australia

In November, China’s Services Purchasing Managers’ Index (PMI) dropped to 52.1 from 52.6 in October. This number was slightly higher than the expected level of 52. After the PMI data was released, the Australian Dollar (AUD) gained strength, with the AUD/USD rising by 0.23% to 0.6572. Among major currencies, the Australian Dollar was the strongest against the US Dollar. The Reserve Bank of Australia (RBA) sets interest rates that significantly affect the value of the Australian Dollar. Additionally, Australia’s wealth in natural resources and the prices of exports, especially Iron Ore, play a crucial role. As Australia’s largest trading partner, China affects the AUD through its demand for raw materials and goods. The performance of the Chinese economy can either support or weaken the AUD, depending on its growth rate. Iron Ore, which is Australia’s biggest export, greatly impacts the AUD. When Iron Ore prices rise, the AUD usually increases in value due to higher demand and better trade balances. A positive Trade Balance, where exports exceed imports, strengthens the AUD by creating more demand. Conversely, a negative Trade Balance can weaken it.

Market Impact on AUD and Interest Rates

In November, the Chinese services sector showed slight slowing. However, the PMI reading of 52.1 was above predictions. Today, the Australian Dollar is gaining against the US Dollar, indicating that traders are reacting more positively to the better-than-expected results rather than the small decrease since October. This swift positive response to modest Chinese data suggests solid support for the AUD. We think this strength of the AUD is influenced more by other factors, especially interest rate differences. Australian inflation has consistently been above the central bank’s target. The latest figures from October 2025 show an annual inflation rate of 3.5%. In contrast, the US Federal Reserve hints at possible interest rate cuts in early 2026, creating a favorable yield gap for the Aussie. Iron ore prices are also providing strong support for the AUD, consistently remaining above $135 per ton in Singapore’s futures trading. This price stability, fueled by demand from Chinese steel mills restocking, helps alleviate concerns about the broader economic situation in China. Similarly, in late 2023, the market overlooked weak property data and focused instead on temporary industrial demand. For derivative traders, this situation creates a volatile environment for AUD/USD. With the conflicting signals from a slower Chinese economy and a hawkish Reserve Bank of Australia, making direct bets can be risky. Strategies like buying options (straddles or strangles) could help traders capitalize on significant price movements in either direction in the upcoming weeks. Those with a clear direction in mind could consider AUD/JPY call options, betting on continued strength of the Aussie against a yen weakened by Japan’s very low interest rates. There’s also value in using futures to hedge exposure for businesses purchasing Australian commodities. Locking in current AUD exchange rates could protect against an increase driven by the RBA keeping rates higher for a longer period than expected. Looking ahead, the upcoming monthly Consumer Price Index (CPI) for Australia and China’s trade balance figures will be crucial. Any unexpected rise in Australian inflation might strengthen the belief that the RBA will not reduce rates soon, providing further support for the AUD. Thus, we should prepare for greater price fluctuations around these significant releases in December 2025 and January 2026. Create your live VT Markets account and start trading now.

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