Are Chinese stocks anticipating an Aussie crash?

Key points

• Chinese stocks continue to falter, approaching 15-year lows
• AUD/USD currently shares a positive correlation with Chinese stocks around +0.5
• AUD/USD remains near the bottom of its 20-year range - currently near 0.6600

Chinese stocks approaching lows

A market that has recently been under the spotlight is the Chinese stock market, which has seen a significant downturn, closely approaching 15-year lows. This downturn has implications for global markets, including the Australian dollar (AUD), which has historically shared a strong correlation with Chinese equities.

The iShares China Large-Cap ETF (FXI), a major Chinese stock ETF, has recently traded below the $24 mark, a notable dip given the broader context of global stock performance. While markets like the NASDAQ and Eurozone stocks have been flirting with all-time highs, it begs the question: why are Chinese stocks lagging, down 25% from their yearly highs?

To understand this, we need to look back to the initial pandemic crash in March 2020. Global stock markets plummeted but then made a remarkable comeback by the end of the year. Chinese stocks followed suit, but unlike their global counterparts, they failed to sustain the recovery into 2021 and 2022. This stagnation in growth is particularly significant given the role of China's economy in exporting goods; the balance of trade is a critical data point for the nation's economic health. Recent figures have shown lackluster performance in this area, highlighting the challenges faced by the Chinese market.

China's impact on Australian dollar

The Australian dollar, too, has been feeling the pressure. As Chinese economic data falters, the AUD has been trading lower, currently hovering around 0.6600 against the USD. This trend is not all that surprising, given that Chinese stocks and Austalian dollar have shared a positive correlation over the past decade - +0.5 at present. This is not to say that the Australian economy doesn't have its strengths, such as its gold production, but these have not been enough to offset the drag caused by China's economic slowdown.

However, markets are dynamic, and past performance is not always indicative of future results. The divergence we see today, with U.S. stocks up and Chinese stocks down, cannot continue indefinitely. At some point, the pendulum may swing back, and an uptick in Chinese economic data could spur a resurgence in the AUD. The next move for Australian dollar may not even hinge on the trajectory of Chinese stocks, but traders will continue to monitor economic data from the region for emerging trends.

How to trade AUD/USD

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on AUD/USD

Trading forex requires an account with a forex provider like tastyfx. AUD/USD can be found in tastyfx's platform under the 'Major' pairs tab. Many traders also watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s Learn Center. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.