Is Chinese economic recovery good or bad for the global economy? Fixing supply chain problems and strong demand is good, but things are not that simple. Which currency will win anyway? Let’s discuss the Forex outlook and make up an AUDUSD trading plan.
Monthly Australian dollar fundamental analysis
China should not be underestimated. The increase in the IMF forecast for China’s GDP for 2023 by 0.8% to 5.2%, of course, is good news for the yuan and proxy currencies, including the Australian dollar. However, a 5% economic growth for Beijing is quite normal. The growth rate should be abnormally high to produce an incredible effect. Thus, the US exit from lockdowns turned into a rise in GDP to 5.9% in 2021. The euro-area GDP expanded by 3.5% in 2022, even considering weak economic growth in the second half of the year due to the war with Ukraine and the energy crisis. How will China’s expansion affect the global situation? How high will the AUDUSD rise?
IMF forecasts for advanced economies
Source: Bloomberg.
The signs of the Chinese economic recovery include the first in the past four months rise in the manufacturing PMI in January above the critical level of 50, indicating the expansion of GDP. The non-manufacturing purchasing managers index hit 54.4, the highest level in 7 months. But January is a seasonally weak period, as people usually return to their families to celebrate the onset of the Lunar New Year. The start of 2023 turned out to be different, featuring stronger domestic data, which set in a positive mood and contributes to the growth of optimism in the markets.
The main beneficiaries of the Chinese GDP expansion this year will be the currencies of those countries for which Asia’s largest economy is the largest market. 43% of Australian exports went to China in 2021. Not surprisingly, the Aussie has become the leader of the G10 currency race. Even the unexpectedly deep decline in Australia’s retail sales by 3.9% in December was only temporary support for the AUDUSD bears. Unable to stay below the support at 0.703, the pair rushed up. The initiative has returned to the bulls, and they are likely to keep it for most of the year.
Investors are currently wondering if the explosive GDP recovery in China will be good for the global economy or if it will bring disaster through rising commodity prices, accelerating inflation, and the return of the world’s central banks to aggressive monetary tightening. The AUD is a currency that wins either way.
A drop in commodity prices pressed down the AUDUSD in January-October 2022. However, the rise in commodities will support the Australian dollar as a commodity currency.
Dynamics of AUDUSD and commodity prices
Source: Trading Economics
Perhaps for some, the Aussie’s 4% rise since the beginning of the year is a reason to be cautious and look for corrections. Nonetheless, I believe markets and international organizations still underestimate China. This means the potential for an upward movement in AUDUSD has not been exhausted. Any currency in Forex experiences drawdowns from time to time. However, when the trend is up, one can buy the Australian dollar cheaper on the corrections.
Monthly AUDUSD trading plan
I stick to my previous forecasts for the AUDUSD, suggesting the pair should reach 0.715 и 0.735. It is relevant to enter longs on corrections.
Price chart of AUDUSD in real time mode
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