China’s Consumer Price Index (CPI) fell by 0.3% year-on-year in September, compared to a 0.4% decline in August. Market expectations were set at -0.1% for the period. Month-on-month, CPI inflation rose slightly by 0.1%, which was lower than the anticipated 0.2%.

The Producer Price Index (PPI) decreased by 2.3% year-on-year in September, improving from August’s 2.9% drop and aligning with market predictions. This data was released amidst rising trade tensions between China and the US, with these figures potentially influencing various markets.

Impact On The Australian Dollar

At the time of reporting, the AUD/USD pair rose by 0.25%, trading at 0.6502. The Australian Dollar showed strength against several major currencies, particularly the New Zealand Dollar. Fluctuations in China’s economy often impact the Australian Dollar due to strong trade ties, affecting Australia’s economic metrics.

The Reserve Bank of Australia’s interest rates, iron ore prices, and China’s economic health are key factors influencing the Australian Dollar. Australia’s trade balance can also impact the currency’s value. Generally, a positive trade balance or rising iron ore prices boosts the Australian Dollar, while a poor trade balance or declining prices can weaken it.

The recent Chinese inflation data showing a -0.3% year-over-year drop is a clear warning sign for the coming weeks. This deflationary pressure is worse than expected and signals that weak domestic demand in China may be more entrenched than we thought. For us, this confirms that bearish strategies on assets tied to Chinese growth are now more attractive.

The Australian dollar is particularly vulnerable given its strong economic ties to China. We’ve already seen Australia’s latest trade data from August 2025 show a sharp 5% fall in exports to China, which significantly narrowed the trade surplus. Therefore, buying put options on the AUD/USD or establishing short positions in AUD futures contracts could be a prudent way to position for further downside.

Commodity Market Effects

This weakness extends directly to key commodities, especially iron ore, which is Australia’s largest export. With China’s producer prices also falling, industrial demand is clearly waning, and we have seen iron ore futures on the Dalian exchange recently break below the key $100 per tonne level for the first time since early 2025. This trend supports positions that anticipate lower commodity prices in the weeks ahead.

Looking back at the data from the past few months in 2025, this isn’t an isolated event but part of a broader pattern of slowing growth. China’s official Q3 2025 GDP growth came in at 4.2%, missing analyst forecasts, while new home prices have now fallen for five consecutive months. This sustained economic drag makes a quick and robust recovery seem increasingly unlikely.

The Reserve Bank of Australia will find it difficult to justify further rate hikes in this environment, which will continue to dampen the AUD’s appeal. In fact, interest rate swap markets are now pricing in only a 15% chance of another RBA hike by the end of 2025, a significant drop from over 50% just a month ago. This creates a potential divergence with the US Federal Reserve’s policy, likely adding further downward pressure on the AUD/USD pair.

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