Australia’s S&P Global Manufacturing PMI rose to 52.2 in December, up from 51.6. However, the S&P Global Services PMI fell to 51.0 from 52.8, and the Composite PMI decreased to 51.1 from 52.6. At the same time, the AUD/USD exchange rate dropped by 0.20% to 0.6638. The Australian Dollar is influenced by several factors, including interest rates from the Reserve Bank of Australia, Iron Ore prices, the health of the Chinese economy, and Australia’s Trade Balance.

Impact Of The Reserve Bank Of Australia

The Reserve Bank of Australia (RBA) influences the Australian Dollar by setting interest rates to keep inflation stable. Higher interest rates, compared to other central banks, tend to strengthen the AUD, while quantitative easing usually has a negative effect. China’s economy greatly affects the AUD because it is Australia’s biggest trading partner. When China’s economy performs well, demand grows for Australian exports, benefiting the AUD. Iron Ore prices significantly impact the AUD since it is Australia’s top export. Higher Iron Ore prices typically lead to a better Trade Balance and a stronger AUD. A positive Trade Balance means greater demand for Australian exports, which can lift the AUD further. Recent data from December 2025 presents a mixed view of the Australian economy. Manufacturing is improving, but the larger services sector is slowing. This overall decline in momentum likely explains why the Australian dollar is weaker today. Traders should proceed cautiously with long positions on the AUD. This slowdown in growth is crucial for the RBA. Since the official cash rate has remained at 4.10% since mid-2023, this new information makes further interest rate hikes unlikely. The market might start to anticipate rate cuts by mid-2026, which would weaken the currency further.

Economic Impact Of China

The outlook for the AUD is also affected by China, Australia’s largest trading partner. In November 2025, China’s industrial production grew by just 3.1%, falling short of market expectations and suggesting lower demand for raw materials. This has a direct impact on Iron Ore prices, which have fallen to around $112 per tonne after reaching a peak earlier in the fourth quarter. Given these challenges, traders might consider positioning for a possible decline in the AUD/USD. Buying put options that expire in late January or February 2026 could allow for profit if the exchange rate moves lower, potentially toward 0.6550. This approach limits risk to the cost of the options. The mixed signals between persistent inflation, which was reported at 3.4% in Q3 2025, and slowing growth could cause increased volatility. Traders could consider using vertical put spreads on the AUD/USD for a bearish outlook while reducing the overall cost compared to outright options. This method provides a defined risk strategy for potentially profiting from a decline in the currency during the quieter holiday weeks. Create your live VT Markets account and start trading now.

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