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AUD/CNY forecast: Australian dollar strength contrasts slumping Chinese yuan

By Nicole Willing

Edited by Valerie Medleva

13:06, 19 September 2022

Australia and China currencies codes on national flags background.
How will the Aussie perform against the renminbi? Photo: An147yus / Shutterstock

The foreign exchange (forex, FX) rate between the Australian dollar (AUD) and Chinese renminbi (CNY) has become increasingly volatile as both currencies have come under pressure from concerns about the outlook for the Chinese economy and falling commodity prices.

The AUD/CNY rate fell by 6% from mid-June to mid-July, rebounded by 6% in mid-August and has slipped back by more than 2% in September.

What has been driving the volatility in the exchange rate and what is the outlook for the AUD/CNY pair for the rest of 2022 and beyond? 

In this article, we look at the recent performance of the two currencies and some of the latest AUD/CNY forecast suggestions from foreign currency analysts.

What drives the AUD/CNY pair?

The AUD/CNY pair refers to how many Chinese renminbi – the quote currency – can be exchanged for one Australian dollar – the base currency.

The renminbi is the official Chinese currency. The term yuan, which is also commonly used – as in yuan renminbi – refers to the unit of currency. There are two types of renminbi: the CNY which is only traded in mainland China and the CNH, which is known as the offshore yuan and traded internationally. 

What is the difference between the two? The CNY is controlled by the Chinese government, while the CNH trades freely on forex markets and can have a different exchange rate to the CNY. But the CNY and CNH are exchanged with each other at a ratio of 1:1.

The CNY is regulated by the People's Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE). The PBoC sets the reference rate for the CNY daily and only allows the price to fluctuate within 2% of its value. The CNH is regulated by the Hong Kong Monetary Authority and allowed to fluctuate in value against other currencies, based on forex market drivers such as macroeconomic and geopolitical factors.

The CNH gives access to overseas individuals and businesses to the currency of the world’s second largest economy based on gross domestic product (GDP). 

The Australian dollar, also known as the Aussie, is the world’s fifth most traded currency, although it has the 12th largest economy. The Australian is considered to be a commodity currency, along with currencies like the New Zealand dollar (NZD) and Canadian dollar (CAD). In Australia, the mining industry accounts for 11.5% of the economy. Natural resources account for 68.7% of the county’s exports.

The value of currencies is typically driven by economic factors, such as GDP growth, trade balances, manufacturing activity, employment and monetary policy on interest rates and inflation. In the case of the Aussie dollar, its value is also strongly influenced by the Chinese economy, as China accounts for 36.5% of all its exports.

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Chinese economic slowdown reduces risk appetite 

The Reserve Bank of Australia (RBA), the country’s central bank, raised its benchmark interest rate by another 50 basis points to 2.35% on 6 September, as expected, meaning that it has raised rates by a total of 225 basis points in 126 days to a seven-year high. RBA Governor Philip Lowe indicated that “the Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path.”

However, as analysts at HSBC noted last week, the Australian dollar “has not been very responsive to rate announcements by the RBA over the past year; instead it has been more sensitive to the change in market-wide risk appetite”.

That risk appetite in part has been affected by the outlook for the Chinese economy.

On 5 September the PBoC announced it would reduce the reserve requirement ratio for foreign currency deposits to 6% from the 8% with effect from 15 September. That followed a 100-basis point cut in May. 

“Similar to the previous move in May, this was triggered by rapid USD/CNY gains on the back of stronger dollar, diverging monetary policies driving deepening negative yield gap against CNY and weakening recovery outlook in China’s economy,” according to analysts at Singapore’s UOB Bank. 

“Negative growth factors including the drought and power crunch in Aug and spreading COVID lockdowns, are seen adding to concerns over the prolonged downturn in the domestic property market and waning external demand. Our GDP growth forecast for China has since been revised [to] 3.3% for 2022 (from 4.1%) and 4.8% for 2023 (from 5.0%).”

The PBoC moved to curb speculation on the yuan depreciation as the yuan fell to two-year lows against the dollar, with the USD/CNH pair trading above the 7.00 level.

AUD/USD

0.67 Price
-0.250% 1D Chg, %
Long position overnight fee -0.0065%
Short position overnight fee -0.0017%
Overnight fee time 21:00 (UTC)
Spread 0.00006

EUR/USD

1.09 Price
-0.300% 1D Chg, %
Long position overnight fee -0.0087%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 0.00006

GBP/USD

1.30 Price
-0.400% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00013

GBP/JPY

203.68 Price
+0.290% 1D Chg, %
Long position overnight fee 0.0101%
Short position overnight fee -0.0183%
Overnight fee time 21:00 (UTC)
Spread 0.038

The Chinese economy is showing signs of slowing, with both export growth and domestic demand slowing in August. Imports rose by just 0.3% year on year in August and exports slowed to 7.1% from a year earlier, data showed on Friday. China’s National Bureau of Statistics stated: 

“We should be aware that the international environment is still complicated and severe and the foundation of domestic economic recovery is not solid.”

AUD/CNY volatility rises

The AUD/CNY pair has been volatile in recent months as both currencies have come under pressure from strength in the US dollar, which is trading at 20-year highs. The Australian dollar bought 4.57 CNY at the start of 2022. The pair climbed to 4.82 in early April, as the Australian dollar climbed on rallying commodity prices following the Russian invasion of Ukraine.

AUD/CNY 5-year chart

But the pair began to retreat as commodity prices pulled back from the highs and concerns about the impact of Covid-19 lockdowns in China took precedence. AUD/CNY fell to 4.52 on 11 July, but then rebounded to 4.80 on 12 August. The Aussie could not hold onto the gains, however and dropped to 4.66 on 13 September.

The rate of interest rate rises in the US is setting the tone across the forex markets, and is outweighing the effect of the RBA’s interest rate increases on the value of the Aussie dollar.

Analysis by the Western Australian Treasury Corporation noted on 16 September:

“The Aussie dollar is down against all the major currencies this week, reflecting the deterioration in global sentiment after the upside surprise to US inflation and the resultant rise in fed funds rate hike expectations. The Australian dollar depreciated most against the stronger greenback.” 

What is the outlook for the AUD/CNY rate in the current economic environment? Let’s look at an Australian dollar to Chinese yuan forecast round-up.

AUD/CNY forecast: Will the AUD or CNY prevail amid macro uncertainty?

Analysts at UK-based foreign exchange firm Monex have been bearish on the outlook for the Chinese currency: “Our expectation of narrowing rate differentials and a slowing in the Chinese economy driven in large part by China’s Zero-Covid policy has led us to be bearish on the Chinese yuan since February.

“This has only been emboldened by the PBoC’s decision to ease the 1-year medium-term lending facility rate in August amid a housing-led slowdown in the economy and signs of further Covid restrictions being implemented as case counts continue to rise. However, the recent actions by the PBoC to push back against CNY depreciation suggest that downwards pressure is likely to ease unless widespread lockdowns are implemented ahead of the National Congress in October.”

Australian bank Westpac predicted that the Aussie dollar could remain in a 4.62-4.80 range against the yuan over the next two years. The bank’s AUD/CNY forecast puts the pair at 4.69 in the fourth quarter of 2022 and first quarter of 2023, 4.62 in the second quarter, 4.73 by the fourth quarter and 4.80 by the second quarter of 2024.

Westpac had held a positive outlook for the AUD in 2022 based on expectations that the sharp slowdown in the US economy would weigh on the US dollar. “We had also expected that markets would respond to an improving outlook for the Chinese economy in the second half of 2022, providing a positive confidence base for the Australian dollar,” and that high commodity prices would provide tailwinds, Westpac Chief Economist Bill Evans wrote in the bank’s September outlook.

“Clearly these factors are going to be outweighed by a much more aggressive US FOMC than had been our expectation (with the fed funds rate now likely to peak materially higher than we previously anticipated); as well as ongoing setbacks with the zero-Covid policy in China and its parlous property market (although there is encouraging evidence that the Chinese authorities are now addressing the issue).

“Because Australia’s outperformance on commodity prices is centred on fossil fuels, markets are heavily discounting our trade performance, in particular questioning whether the current terms of trade surge will be followed by the style of mining investment boom that we saw during the early 2010’s… But the dominant headwind for a risk currency like the AUD will be ongoing uncertainty in 2022 – uncertainty about the level and timing of the peak in central bank interest rates (especially the FOMC), and uncertainty about the global inflation profile.”
AUD/CNY predictions
 Q3 2022Q4 2022Q1 2023Q2 2023Q3 2023Q4 2023Q1 2024Q2 2024Q3 2024Q4 2024
National Australia Bank4.594.664.694.694.724.754.624.644.674.74
Trading Economics4.65559---4.52031-----
Westpac-4.694.694.624.674.734.774.80--

Source: National Australia Bank, Trading Economics, Westpac

The AUD/CNY forecast from 2022 from National Australia Bank showed the pair trading at 4.59 by the end of the third quarter and rising to 4.66 at the end of the year. The pair could then trade up to 4.75 by the end of 2023 and retreat to 4.62 before in the first quarter of 2024. The Aussie dollar could then move back up to 4.74 at the end of 2024, indicating a relatively strong AUD/CNY forecast in 2025.

The AUD/CNY prediction from Trading Economics indicated that the pair could trade at 4.65559 by the end of this quarter and at 4.52031 in one year, based on global macro model projections and analysts’ expectations. Analysts have yet to issue an AUD/CNY forecast for 2030.

If you are interested in trading the AUD/CNY pair you should keep in mind that currency markets are highly volatile. We recommend that you always do your own research before making any investment decision based on an AUD/CNY forecast. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion and remember that past performance is no guarantee of future returns. And never invest money that you cannot afford to lose.

FAQs

Why has AUD/CNY been dropping?

The Australian dollar has come under pressure from a strong US dollar and concerns about the impact of lower commodity prices and slowing economic growth on demand for Australian commodities.

Will AUD/CNY go up or down?

The direction of the AUD/CNY pair will likely depend on central bank policy in China and Australia, as well as the US, in addition to China’s economic performance, among other factors.

When is the best time to trade AUD/CNY?

The most active trading time for the market is usually around the release of major macroeconomic data and monetary policy statements or major geopolitical events, which tend to drive volatility on currency markets, increasing liquidity and creating opportunities for traders to profit. However, you should keep in mind that high volatility increases risks of losses.

Is AUD/CNY a buy, sell or hold?

How you trade the AUD/CNY pair is a personal decision depending on your risk tolerance, investing strategy and portfolio composition. You should do your own research to take an informed view of the market. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

Markets in this article

NZD/USD
NZD/USD
0.60537 USD
-0.0028 -0.460%
USD/CAD
USD/CAD
1.37055 USD
0.00183 +0.130%
USD/CNH
USD/CNH
7.27598 USD
0.00561 +0.080%

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