In December, China’s official Manufacturing Purchasing Managers’ Index (PMI) increased to 50.1, up from the previous reading of 49.2. This surpasses the market expectation of 49.2 for the month.
The NBS Non-Manufacturing PMI also rose to 50.2 in December, compared to November’s 49.5, while market predictions were for a 49.8 reading. At the time, the AUD/USD pair traded around 0.6696, marking a 0.05% increase on the day.
Factors Influencing The Australian Dollar
The Australian Dollar (AUD) is influenced by several factors, including the Reserve Bank of Australia’s interest rates. It is also impacted by Australia’s largest export, Iron Ore, and the health of the Chinese economy, Australia’s main trading partner.
China’s economic performance affects the AUD, with a thriving Chinese economy boosting demand for Australian exports, hence increasing the AUD’s value. Conversely, a slowing Chinese economy can negatively affect the AUD.
The price of Iron Ore significantly impacts the AUD, rising prices tend to elevate the currency. Additionally, Australia’s Trade Balance, representing the difference between exports and imports, strengthens the AUD when positive, and weakens it when negative.
End Of Year Economic Outlook
As we close out 2025, the latest figures from China show its manufacturing sector has expanded for the first time in three months, with the PMI rising to 50.1. This beat expectations and suggests a potential stabilization in our largest trading partner’s economy. This positive surprise, combined with a stronger non-manufacturing PMI, is a signal we must act on heading into the new year.
The Australian dollar, a key proxy for Chinese economic health, has already reacted positively, trading around the 0.6700 level. This data provides a compelling reason to anticipate further strength in the AUD/USD pair in the coming weeks. We should consider positioning for a move higher, as the market digests this shift in momentum from China.
This news directly supports commodity prices, especially iron ore, which has recently climbed back to $115 per tonne after struggling for much of the past year. Looking back, the sustained weakness in Chinese industrial activity during 2024 and 2025 was a major drag on prices. A sustained PMI above 50 could signal renewed demand, boosting Australia’s export values and strengthening our currency.
For our trading strategies, implied volatility in AUD options has been relatively low amid holiday trading. This presents an opportunity to buy call options or establish bullish call spreads on AUD/USD at a reasonable cost. These positions would allow us to profit from a potential rally in early 2026 while clearly defining our maximum risk.
This external economic boost also changes the calculus for the Reserve Bank of Australia, which has held interest rates steady at 4.35% for over a year. A stronger Australian economy, buoyed by Chinese demand, would reduce any pressure on the RBA to consider rate cuts in the first half of 2026. This reinforces the case for a stronger Aussie dollar, as interest rate differentials would remain favorable.
