Australian Dollar Declines Amid Capital Outflows from China

• The Australian Dollar held steady despite indications of weakening domestic consumer confidence.
• China’s State Administration of Foreign Exchange announced a record net capital outflow of $45.7 billion in November.
• The US Dollar faces challenges as traders anticipate a 25 basis point rate cut from the Federal Reserve.

The Australian Dollar (AUD) remains stable after domestic consumer confidence shows signs of weakening, with December data revealing a decline as pessimism about the economic outlook grows. Additionally, traders are focusing on the potential for an interest rate cut by the US Federal Reserve (Fed) on Wednesday, with significant attention on the Fed’s 2025 projections.

Westpac’s Consumer Confidence Index in Australia dropped by 2% to 92.8 points in December, erasing two months of gains after a 5.3% increase in November. Meanwhile, traders are keeping an eye on upcoming US Retail Sales data due to be released later during the North American session.

China’s State Administration of Foreign Exchange (SAFE) reported a record net capital outflow of $45.7 billion in November. Cross-border portfolio investment inflows amounted to $188.9 billion, while outflows reached $234.6 billion, leading to the largest monthly deficit ever recorded in this category.

The US Dollar (USD) remains weak for a third consecutive session as markets await the Fed’s decision. On Monday, the preliminary S&P Global Composite Purchasing Managers Index (PMI) rose to 56.6 in December, up from 54.9 previously, while the Services PMI improved to 58.5 from 56.1. However, the Manufacturing PMI slipped to 48.3 from November’s 49.7.

According to the CME FedWatch tool, markets are now largely expecting a 25 basis point rate cut at the Fed’s December meeting. Investors are also closely watching Fed Chair Jerome Powell’s press conference and the release of the Summary of Economic Projections (dot-plot) for further insights.

The Australian Dollar remains unchanged amid market uncertainty ahead of the Federal Reserve’s decision.

• China’s Foreign Minister stated, “We hope the new US administration will make the ‘right’ choices and work with China, eliminating disruptions and overcoming obstacles.” The minister also said that China must give a firm and forceful response to the US ‘blatant interference’ in China’s internal affairs on issues such as Taiwan.
• Chinese authorities, led by President Xi Jinping, have pledged to raise the fiscal deficit target next year, shifting policy focus to consumption to boost the economy amid looming 10% US tariffs threatening exports. The lack of concrete details on fiscal support has put downward pressure on the AUD, given China’s status as Australia’s largest trading partner.
• China’s Retail Sales (YoY) rose 3.0% in November, against its expected 4.6% and previous 4.8% readings. Meanwhile, annual Industrial Production increased by 5.4%, exceeding the market consensus of a 5.3% rise.
• The National Bureau of Statistics (NBS) in China shared its economic outlook during a press conference on Monday. It stated that the economy remained generally stable in November, with increasing signs of positive changes. The recovery trend in consumption remains intact, and the bureau emphasized plans to implement additional policies aimed at expanding domestic demand.
• Traders are increasing their bets that the Reserve Bank of Australia (RBA) will cut interest rates sooner and more significantly than initially expected. However, future decisions will be data-driven, with evolving risk assessments guiding the RBA’s approach.
• The preliminary Australia’s Judo Bank Manufacturing Purchasing Managers Index (PMI) declined to 48.2 in December from 49.4 in November. Meanwhile, the Services PMI eased to 50.4 in December from the previous reading of 50.5. The Composite PMI dropped to 49.9 in December versus 50.2 prior.
• Beijing has already begun retaliation against Trump trade sanctions, launching a probe into Nvidia, threatening to blacklist a US apparel company, blocking the export of critical minerals to the United States, and tightening the supply chain for drones.
• The RBA kept the Official Cash Rate (OCR) unchanged at 4.35% in its final policy meeting in December. RBA Governor Michele Bullock highlighted that while upside inflation risks have eased, they persist and require ongoing vigilance. The RBA will closely monitor all economic data, including employment figures, to guide future policy decisions.

Technical Analysis: Australian Dollar holds above 0.6350, near yearly lows

The AUD/USD pair remains steady near 0.6370 as of Tuesday. A review of the daily chart indicates a prevailing bearish trend, with the pair trading within a descending channel. The 14-day Relative Strength Index (RSI) is positioned above 30, signaling continued bearish momentum.

The pair is currently supported by the yearly low of 0.6348, last reached on August 5. A breach below this level could intensify selling pressure, pushing the AUD/USD pair toward the lower boundary of the descending channel near 0.6170.

On the resistance side, the AUD/USD pair is testing the nine-day Exponential Moving Average (EMA) at 0.6390, followed by the 14-day EMA at 0.6412, which aligns with the top of the descending channel. A strong breakout above this channel could propel the pair toward the eight-week high of 0.6687.

AUD/USD: Daily Chart