Chinese President Xi Jinping has committed to implementing more proactive macroeconomic policies. He aims to promote the economy for effective qualitative improvement and achieve reasonable quantitative growth.
At the time of writing, the AUD/USD pair is trading around 0.6690, reflecting a minor decrease of 0.04% on the day.
Factors Influencing The Australian Dollar
The Australian Dollar (AUD) is influenced by several factors, including interest rates set by the Reserve Bank of Australia (RBA), the price of Iron Ore, and the health of the Chinese economy. Market sentiment also affects the AUD, with a risk-on environment being favourable.
The RBA impacts the AUD by setting interest rates, aiming to maintain inflation between 2-3%. High interest rates support the AUD, and the RBA also uses quantitative easing and tightening to influence credit conditions.
China is Australia’s largest trading partner, so its economic health heavily influences the AUD’s value. When China’s economy thrives, demand for the AUD increases.
Iron Ore, Australia’s largest export, also affects the AUD. Rising Iron Ore prices increase demand for the AUD, benefiting the trade balance.
The Trade Balance, the difference between export earnings and import payments, impacts the AUD. A positive Trade Balance strengthens the AUD, while a negative one has the opposite effect.
Chinese Economic Stimulus And Its Impact
China’s signal for more economic stimulus is a key development as we head into the new year. For us, this suggests a potential increase in demand for Australian raw materials. This could provide a significant tailwind for the Australian dollar in the coming weeks.
We are already seeing a reaction in the price of iron ore, Australia’s most important export. Futures prices have climbed to around $125 per tonne this week, recovering from lows we saw earlier in the fourth quarter of 2025. Historically, as we saw during the volatile periods of 2023 and 2024, rising iron ore demand has provided strong support for the AUD.
This push for stimulus is not surprising given some of the recent data out of China. Industrial production for November 2025 grew by a modest 4.1%, which missed analyst expectations. These new policy announcements are a direct attempt to counter that economic softness.
With the AUD/USD currently trading near 0.6690, we should consider positioning for a potential move higher in the first quarter of 2026. This environment could make call options on the AUD/USD an effective strategy to capture potential upside. We are watching for a break above the 0.6750 level that has capped the pair for much of the last quarter.
However, we must also watch the Reserve Bank of Australia’s next moves closely. The RBA held its cash rate steady at 3.85% in its December 2025 meeting, citing lingering domestic inflation concerns. Any signal of a future rate cut could limit the Aussie dollar’s gains, creating a conflict between Chinese demand and Australian monetary policy.
