AUD to USD Forecast: PBoC Decisions Could Boost Australian Dollar Demand

Economic Indicators: Impact of China’s Loan Prime Rates on the Aussie Dollar

On Monday, July 22, the People’s Bank of China (PBoC) may influence demand for the AUD/USD.

Economists expect the PBoC to keep the one-year and five-year loan prime rates (LPR) at 3.45% and 3.95%, respectively.

A surprise cut to loan prime rates could increase AUD/USD demand. Lower LPRs may increase borrowing and spending, which could boost the Australian economy and the Aussie dollar.

China accounts for one-third of Australian exports. Furthermore, Australia has a trade-to-GDP ratio of over 50%, with one in five jobs being trade-related. Increased demand from China would improve Australian trade terms and labor market conditions.

After a lack of meaningful stimulus measures from the Communist Party’s Third Plenum, steady LPRs could affect Aussie dollar demand. Additionally, the lack of further PBoC policy support may also reduce bets on an RBA rate hike.

The RBA and the Chinese Economy

In February, RBA Governor Michele Bullock stated that staff considered the Chinese economy in their forecasts. Weaker Chinese economic growth could raise concerns about trade terms and the Australian economy’s outlook.

In Q2 2024, the Chinese economy expanded by 4.7%, down from 5.3% in Q1 2024. EU and US tariffs may further impact the Chinese economy as domestic demand wanes. The net effect could be a deterioration in trade terms between Australia and China.

The RBA may consider weaker demand from China and the impact on Aussie labor market conditions. Softer labor market conditions may affect wage growth and reduce disposable income. Lower disposable income could curb consumer spending and dampen demand-driven inflation.

What Do the Experts Say About China Policy?

On Friday, July 19, Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero reacted to the readout of China’s Third Plenum and press conference, stating,

“Nothing new under the sun: the same industrial policies, the same sense of things. Really no change in direction, no consumption-led growth, nothing. No sentence on the power of market forces, nothing. So, it’s really disappointing.”

US Economic Calendar: Chicago Fed National Activity Index

Later in the session on Monday, the Chicago Fed National Activity Index (CFNAI) will garner investor interest.

Economists forecast the Index to increase from 0.18 in May to 0.30 in June.

The CFNAI assesses economic activity and the inflation environment. A higher-than-forecast CFNAI could support investor hopes of a soft US landing. US dollar sensitivity to the June numbers could intensify as investors await Q2 GDP numbers due out on Thursday, July 25.

However, the CFNAI is unlikely to influence investor bets on multiple 2024 Fed rate cuts. This week, the US Services PMI (Wed) and the crucial Personal Income and Outlays Report (Fri) will likely dictate the Fed rate path.

Nevertheless, the AUD/USD could face selling pressure if the CFNAI beats forecasts.

Short-Term Forecast: Bullish

Near-term AUD/USD trends hinge on Services PMIs (Wed) and the US Personal Income and Outlays Report. A pickup in Australian service sector activity could raise investor bets on an RBA rate hike. Conversely, weaker US service sector activity and softer inflation numbers could cement September and December Fed rate cuts.

A more hawkish RBA rate path would tilt monetary policy divergence toward the Aussie dollar and signal an AUD/USD move toward $0.70.

Investors should remain alert, with China and the US economy in focus on Monday. Monitor the real-time data, news updates, and expert commentary to adjust your trading strategies.

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AUD/USD Price Action

Daily Chart

The AUD/USD hovered above the 50-day and 200-day EMAs, confirming the bullish price trends.

An AUD/USD break above the $0.67003 resistance level would support a move toward the $0.67500 handle. Furthermore, a return to the $0.67500 handle could bring the $0.67967 resistance level into play.

The PBoC and the Chicago Fed National Activity Index require consideration on Monday.

Conversely, an AUD/USD break below the top trend line and the 50-day EMA could signal a drop to the 200-day EMA.

With a 14-period Daily RSI reading of 47.14, the AUD could drop to the 200-day EMA before entering oversold territory.