The People’s Bank of China kept its Loan Prime Rates unchanged, leaving the one-year LPR at 3.00% and the five-year LPR at 3.50%. The decision was described as having little to no impact on the Australian Dollar, a common proxy for China risk, with AUD/USD up 0.95% on the day at 0.7015. China sets the LPR monthly as a reference for bank lending, while the PBoC’s Monetary Policy Committee meets quarterly; the central bank also manages the Renminbi against the US Dollar via a daily fix rather than a fully floating exchange rate.
In technical terms, AUD/USD remained below the 100-day simple moving average and the Bollinger middle band, while the 14-day Relative Strength Index drifted towards the mid-30s. Resistance was flagged around 0.7080–0.7085, with the upper Bollinger band near 0.7212, while support sat close to the lower band at about 0.6955. Separately, the PBoC’s toolkit was outlined as including the seven-day Reverse Repo Rate, the Medium-term Lending Facility, foreign exchange intervention and the Reserve Requirement Ratio, and China was said to have 19 private banks, with WeBank and MYbank cited as the largest.
China’s Cautious Policy and Implications for Australian Exports
The People’s Bank of China has just held its Loan Prime Rates steady, signaling a cautious approach to stimulus. This decision comes as recent data showed China’s industrial production for May grew by only 5.6%, missing expectations and highlighting a patchy economic recovery. For us, this lack of aggressive easing from our largest trading partner suggests potential headwinds for Australian exports in the near term.
Consequently, we see this as a cap on the Australian dollar’s potential over the coming weeks. Weaker stimulus in China directly impacts demand for key commodities, and we note that iron ore prices have already slipped below $110 per tonne, down from over $140 just last year. This environment makes it difficult to build a strong bullish case for the AUD/USD pair.
Positioning and Technical Outlook for AUD/USD
Given this fundamental backdrop, we are positioning for either sideways consolidation or a gradual decline in the AUD/USD. Implied volatility for AUD/USD one-month options is hovering around a modest 8.5%, making strategies that benefit from time decay, like selling call options, attractive. We believe selling calls or implementing bear call spreads offers a favorable risk-reward profile right now.
From a technical standpoint, the AUD/USD is currently struggling below its 100-day simple moving average, which sits near 0.6720 and forms a key resistance level. We would consider selling calls with strike prices at or above this level, targeting expiration in mid-to-late July. A break below the recent support at 0.6580 would open the door for a deeper move down, reinforcing this bearish outlook.
