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The Australian dollar loses ground as RBA minutes add to the disappointment of China's latest economic data.
The Aussie dollar loses further ground in Tuesday trade after the minutes from the Reserve Bank of Australia's (RBA) May meeting show the Board now thinks that rates are somewhat restrictive, which will "give the Board space to see how the conflict in the Middle East develops and Australian households and businesses respond".
The guidance hints that the RBA won't raise interest rates again, depriving the AUD of a major reason for its 2026 outperformance.
"This reaffirms our expectation that the cash rate will be on hold over the remainder of this year," says Ashwin Clarke, Senior Economist at Commonwealth Bank of Australia.
The Australian dollar has risen against most G10 and EM peers in 2026, helped by rising commodity prices and Australia's rising domestic interest rates. The central bank has hiked the cash rate on three occasions already this year.
That means Australia offers global investors the highest real rates of any major developed economy, a potent driver of AUD appreciation.
But if the RBA chooses to hold rates going forward, that outperformance can fade.
We see the pound-Australian dollar exchange rate rising to 1.8816 on Tuesday, the highest level in a week. The Australian dollar-U.S. dollar rate is down 0.60% at 0.7127.
Consensus projections for the next four quarters, compiled from leading investment banks.
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The Australian dollar started the week on a soft footing amidst a rising U.S. dollar and a generalised retrenchment in investor sentiment, amidst fears the U.S. was ready to restart hostilities against Iran.
Perhaps more pertinent for the Aussie were the dire data out of China, Australia's most important export market and trading partner.
China's industrial production growth slowed from 5.7% y/y in March to 4.1% in April, well below expectations of 6.0%.
When seasonally adjusted, China’s industrial output fell from 0.28% m/m in March to 0.05% in April, marking the lowest level since March 2024.
"The surprising slowdown in China’s industrial output last month suggests that domestic conditions are worsening to such a state that stronger exports may not be enough to keep output strong," says Vivek Dhar, an economist at Commonwealth Bank.
Infrastructure investment - a major driver of global commodity demand - recorded a second consecutive decline last month, accelerating from ‑5.3% m/m in March to ‑8.6% in April.
"This suggests that China’s commodity demand will remain weak through 2026," says Dhar.
China is the primary landing point for Australia's commodity exports, meaning a slowdown in demand will prove a headwind for the domestic economy, and the Aussie dollar.
