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Australian Dollar Vulnerable to Chinese Reopening Disappointment

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The Australian Dollar is an obvious casualty of fresh market concerns centred over China's response to the Covid pandemic, and further losses are likely say institutional currency analysts we follow.

The Australian Dollar fell and the U.S. Dollar rose at the start of the new week as investors reacted to news Chinese Covid cases were rising again and authorities were intent on tightening restrictions to avoid a major spike in cases.

"We still see AUD as vulnerable to an unwind of the improved sentiment in China as the risk of more widespead lockdowns increases and, even where constraints are lighter, consumers are only responding very slowly to easing constraints," says Elsa Lignos, Global Head of FX Strategy at RBC Europe Limited.

The developments in China come just a week after the government announced an easing in its Covid policy that would allow local authorities more autonomy in responding to the virus. Crucially though, authorities were still required to keep cases down.

This confirmed rumours and speculation that China was moving away from its zero-Covid stance, something investors believed would boost global growth prospects to the benefit of currencies such as the Australian Dollar which has rallied over recent weeks.

But, just days after the government announced a shift in stance, Beijing reported three Covid deaths over the weekend, the first in more than six months.

Meanwhile, case counts across the country are also seen spiking.

"China's Covid cases are at Apr-22 highs, yet, the new policy reaction function is unknown. However, the logic of exponential virus spread, means further lockdowns will likely be required," says economist Callum Bruce at Goldman Sachs.

A spike in cases over the weekend in the city of Shijiazhuang, close to Beijing, resulted in officials asking residents to stay at home on Monday.

This was just days after the city eased some controls, including mass testing while allowing students to return to school. The u-turn confirms the challenges facing authorities tasked with taking a more targeted approach to Covid management while keeping cases capped.

Doctors in China say the country's healthcare system is not prepared to deal with a huge nationwide coronavirus outbreak should authorities ease controls.

The warning for China's leaders was delivered by a dozen health professionals — including frontline doctors and nurses and local government health officials — interviewed by the Financial Times this month.

"The medical system will probably be paralysed when faced with mass cases," one doctor, based in Wuhan, said.

The warnings will jar with investors' expectations for China to ease its strict Covid control policies in order to pursue stronger growth rates.

"The AUD is likely to continue trading on such global factors," says analyst Ashish Agrawal at Barclays Bank in Singapore. "News flow from China could also exert an influence on the AUD, especially if there are renewed signs of tightening in mobility as cases spread."

AUD against GBP and USD

Above: GBP/AUD (top) and AUD/USD (bottom) at daily intervals. To better time your payment requirements, consider setting a free FX rate alert here.

The Australian Dollar fell a percent against the U.S. Dollar to 0.6569 at the start of the new week as investors reacted with disappointment to developments in China.

The Pound to Australian Dollar exchange rate rose 0.70% to trade at 1.7887, AUD payments on a typical bank account are offered around 1.7384 according to our data, but competitive payment providers are offering closer to 1.7830.

Further losses in the Australian Dollar will be likely if the downshift in investor expectations towards China extends, say analysts.

"Ongoing unwinding and reassessment of optimism regarding relaxation of China zero-COVID restrictions weigh on AUD and will continue to do so," says Patrick Bennett, a strategist at CIBC Capital Markets.

David Forrester, Senior FX Strategist at Crédit Agricole, says the AUD has recently enjoyed a double boost from lower UST yields and a weaker USD as well as China's loosening of its Covid restrictions as well as efforts to boost its property sector.

"These boosts are waning, however," he says in a recent daily note to clients.

The analyst adds that the coming days will be a critical test of authorities' will to move towards re-opening, and hence a test of the Australian Dollar.

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