Australian iron ore mine. Image © Adobe Images
The Australian Dollar's 2025 spell of outperformance could extend through March.
This is according to analysts who have an eye on important developments in Australia's most important export market, China.
"The AUD ranks among the best three currencies in G10 this month and is on track for the best start to the calendar year since 2017," says strategist Kenneth Broux at Société Générale.
Broux says there is "upside potential for the AUD over the short-term provided optimism over the Chinese economy spreads and the positive correlation with the CSI-300 and metals holds."
The Aussie appreciated 1.52% against the U.S. Dollar in February, with gains tracking improving equity optimism in China and the rally in industrial metals, says Broux.
"China has been one of the best performing equity markets and the question in everyone’s mind is whether this time it’s different. I’m inclined to say yes," says George Efstathopoulos, Portfolio Manager for Multi Assets at Fidelity International.
Above: AUD/USD has strengthened through 2025
The Australian Dollar is considered a commodity currency as it strongly correlates with commodity prices owing to Australia's massive raw resource export base.
This means a strengthening Chinese economic pulse will naturally benefit Australia.
A key measure of commodity performance - the Bloomberg commodity index - is up 3.4% in February as it extends gains for a second successive month.
Heading into March, market positioning is also favourable, with the market maintaining a substantial net short position of the currency.
This favourable positioning means there is ample scope for further position unwinds on any good news.
According to Commonwealth Bank of Australia, a major event for AUD in March will be the annual session of China’s National People’s Congress (NPC), which is scheduled to open next Wednesday.
"We expect the NPC to announce an increase in government spending. An unexpectedly large increase would strengthen AUD, NZD and CNH," says Carol Kong, a strategist at Commonwealth Bank of Australia.
Research from Fidelity - one of the world's largest asset managers - shows China’s monetary and fiscal policy stance should yield results.
"It was encouraging to see consumption responding to the subsidies, which sent a signal to both policymakers and market participants that there is a strong link between fiscal stimulus and the Chinese consumer," says Fidelity's Efstathopoulos.
Above: Iron ore prices and AUD/USD (bottom pane) are closely correlated. Chinese demand is a decisive driver of iron ore prices.
Commonwealth Bank of Australia expects the Chinese government to raise the fiscal deficit target to 4% of GDP this year, which will be a record high.
Economists say a higher fiscal deficit target will likely be accompanied by increases in the annual issuance quota of ultra‑long special Treasury bonds (STB) and local government special bonds (LGSB).
"Iron ore prices and AUD/USD will likely receive a boost if the annual issuance quota of STB and LGSB is set much stronger than expected," says Kong.
"More generally, any pro‑growth signals will be positive for AUD, NZD and CNH in our view," she adds.
Risks to AUD include the 2025 budget numbers falling short of expectations.
"Chinese policymakers may judge the US’ 10% tariff increase on Chinese imports and other actions have only limited impacts on the Chinese economy," says Kong.
The house view at Commonwealth Bank is for a further escalation in the U.S.‑China trade conflict. We consider the US will impose much higher tariffs on China, which will likely be the trigger for a significant ramp-up in Chinese policy stimulus.
Rising trade tensions will weigh on AUD, but a strong stimulus in China could yet prove the decisive factor in the currency's performance next month.