Insights 
VT 
China and the Australian Economy
China’s RatingDog Manufacturing Purchasing Managers’ Index (PMI) returned to contraction, dropping to 49.9 in November from 50.6 in October. The market had forecast a reading of 50.5.
The AUD/USD pair is trading 0.05% higher on the day, hovering near 0.6550. An essential factor for the Australian Dollar (AUD) is the Reserve Bank of Australia’s (RBA) interest rate levels.
Australia’s economy is resource-rich, with Iron Ore as its largest export, impacting the AUD’s value. China’s economy, its biggest trading partner, heavily influences the AUD, alongside Australia’s inflation rate, growth, and Trade Balance.
The RBA impacts the AUD by setting interest rates for banks. By maintaining a stable inflation rate of 2-3%, the RBA supports the AUD with high rates compared to other central banks, using tools like quantitative easing, which can also affect credit conditions.
Australia’s trade with China affects the Aussie Dollar, as Chinese growth dictates demand for Australian exports. Thus, changes in Chinese growth data directly impact the AUD.
Iron Ore and Trade Balance
Iron Ore, Australia’s largest export worth $118 billion annually, mainly exported to China, can drive the AUD up or down. A higher Trade Balance, derived from favorable exports, strengthens the AUD.
The unexpected contraction in China’s manufacturing PMI to 49.9 is a significant warning sign for the Australian economy. As China is our largest trading partner, this slowdown points to weaker demand for our exports in the coming weeks. This data challenges the recent stability we’ve seen in the Australian dollar.
This directly threatens the price of iron ore, Australia’s biggest export. We have already seen iron ore futures on the Singapore Exchange dip from recent highs of over $125 per tonne in the third quarter of 2025 to around $118 this past week. A sustained slowdown in Chinese manufacturing could push prices back towards the $100 mark, placing considerable pressure on the AUD.
Given this outlook, we believe derivative traders should consider positioning for potential weakness in the AUD/USD pair. Buying put options with strike prices below the 0.6500 level could be a prudent strategy to hedge or speculate on a move lower. This approach offers a defined risk based on the premium paid for the option.
RBA’s Potential Response
This Chinese data also changes the calculus for the Reserve Bank of Australia. The RBA, which has held its cash rate steady at 4.35% for the last four months of 2025, now has less reason to consider a hawkish stance. The market will likely price in a lower probability of any further rate hikes in early 2026, removing a key source of support for the currency.
We saw a similar dynamic play out during the 2015-2016 period when worries about Chinese growth caused a significant downturn for both commodities and the Aussie dollar. That historical precedent suggests the current level near 0.6550 is vulnerable if more weak data emerges from China. This makes short-selling AUD futures contracts another viable strategy for those anticipating a repeat of that pattern.
The effect will also be seen in our trade balance, which has already been narrowing from the larger surpluses seen earlier in 2025. October’s trade surplus figure was A$8.1 billion, and a fall in export revenue will squeeze this further. This fundamental pressure adds another layer to the bearish case for the Australian dollar heading into the new year.
