Australian Dollar remains stronger following China’s economic data
- AUD/USD holds gains as a stronger Australian Dollar draws support from key economic data released by major trading partner China.
- China's Q2 economy grew 0.9% quarter-on-quarter, down from 1.3% in Q1 but meeting market consensus.
- The US Dollar struggles after softer US inflation data fueled hopes that the Fed might adopt a less hawkish stance.
AUD/USD extends its gains for the second successive day, trading around 0.6980 during the Asian hours on Wednesday. The pair holds gains as the Australian Dollar (AUD) remains stronger following the release of key economic data from China, Australia’s close trading partner.
China’s economy expanded 0.9% quarter-on-quarter in the second quarter of 2026, slowing from the 1.3% growth recorded in Q1 but matching market consensus. Gross Domestic Product (GDP) grew by 4.3% month-over-month in Q2, down from a 5.0% expansion in the previous quarter. This annual figure missed Wall Street expectations, coming in softer than the market consensus forecast of 4.5%.
China’s annual June Retail Sales rose by 1.0% versus -0.1% expected and -0.6% prior. Industrial Production came in at 5.3% versus the 4.6% estimate and May’s reading of 4.5%. Meanwhile, the Fixed Asset Investment dropped 5.7% year-to-date (YTD) in June vs. a fall of 4.9% expected and a decline of 4.1% in the previous reading.
Additionally, the AUD/USD pair gains ground as the US Dollar (USD) struggles following softer-than-expected US inflation data, which fueled hopes that the US Federal Reserve (Fed) might adopt a less hawkish monetary stance.
The US Consumer Price Index (CPI) inflation eased to 3.5% year-over-year in June, dropping from a three-year high of 4.2% in May and coming in well below the market consensus of 3.8%. On a monthly basis, headline CPI actually declined by 0.4% in June, a notable shift from the 0.5% increase recorded in May.
Meanwhile, Fed Chair Kevin Warsh reiterated the central bank’s commitment to restoring price stability during congressional testimony on Tuesday but refrained from signaling a more aggressive policy stance.
However, while renewed tensions between the US and Iran drive up oil prices, inflation concerns remain firmly on investors' radars. The CME FedWatch Tool indicates that markets are now pricing in a roughly 50% chance of a Federal Reserve rate hike in September.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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