Australian Dollar Forecast: Yield Spreads, China Rally Fuel AUD/USD upside, Countering Tariff Threat

AUD/USD rally driven by narrowing yield spreads and surging China equities
Aussie 10-year yields top U.S. Treasuries for first time in 2025
Strong AUD/USD correlations with Hang Seng, CSI 300, and USD/CNH
Key test ahead as AUD/USD nears major technical resistance

Summary

Narrowing yield differentials and surging sentiment towards Chinese stocks have powered a strong AUD/USD rally, putting it on the cusp of a major technical breakout. While RBA commentary on Friday could provide the catalyst, a more likely spark may come from Hong Kong’s Hang Seng or Japan’s January inflation report.

A Rally Powered by Multiple Sources

A robust Australian jobs report, hawkish RBA rhetoric, and remarks from U.S. officials—Trump floating the possibility of a China trade deal and Treasury Secretary Scott Bessant outlining plans to lower long-term rates—have helped push Australian 10-year bond yields above U.S. Treasuries for the first time in 2025.

As shown in the chart below, that shift has been key to the Aussie’s resurgence, with the AUD/USD correlation to benchmark yield spreads strengthening to 0.82 over the past fortnight. The two-year yield spread—more reflective of central bank expectations—has been only slightly weaker at 0.78.

Source: TradingView

While yield differentials remain an important driver, the real tailwind appears to be the resurgence in Chinese equities, particularly tech giants listed on the Hang Seng. The fundamental link is tenuous at best, but for a currency often used as a proxy for China sentiment, massive gains on the Hang Seng are clearly supporting AUD/USD. The rolling 10-day correlation between AUD/USD and Hang Seng futures sits at 0.82, with CSI 300 futures not far behind at 0.79.

That China connection is even clearer when looking at AUD/USD’s rolling correlation with USD/CNH over the past fortnight, sitting at -0.93—both currencies moving almost in lockstep against the U.S. dollar.

Implications for Trade Setups

For trade setups, Chinese markets will be key in determining whether AUD/USD can break higher. While RBA officials are addressing policymakers on Friday, the proximity of Australia’s federal election suggests the event may be overshadowed by politics, reducing the likelihood of meaningful rate signals.

Given recent yen strength, Japan’s inflation report may have a greater impact via its implications for the U.S. dollar. You can find the preview here. After Thursday’s USD/JPY move, an in-line inflation print may be needed to prevent a yen reversal, while an upside surprise could weigh on the U.S. dollar.

AUD/USD Technical Analysis

Source: TradingView

From a technical perspective, AUD/USD is testing a major uptrend dating back to October 2022. It bounced strongly off this level multiple times when trading above it—now below, the question is whether sellers will defend it just as aggressively. I’m not convinced, but I’ll let price action dictate the approach.

Momentum indicators favour the bulls, with RSI (14) trending higher but not yet overbought and MACD continuing to rise, reinforcing a near-term upside bias. A clean break above the trendline could see .6450 tested, followed by .6550—both key levels in late 2024, with the 200-day moving average just above the latter.

For longs on a breakout, a stop beneath the trendline offers protection. Conversely, if AUD/USD fails to break higher, shorts could be positioned beneath it with a stop above. A move below .6337 could open the door for a test of .6300 or the 50-day moving average, marking a bearish break of the rising wedge the pair has been trading in.

-- Written by David Scutt

Follow David on Twitter @scutty

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