China’s 2026 Stimulus Fuels Aussie Dollar

As markets approach the close of 2025, a significant macroeconomic signal has emerged from Beijing that could define currency trends in the first quarter of the new year. On December 29, Chinese officials indicated a strategic shift towards a "more active" fiscal policy for 2026. This announcement, aimed at countering external economic headwinds, provides a much-needed tailwind for global commodities and, by extension, the Australian Dollar (AUD).

The Ministry of Finance has outlined priorities to ramp up investment in advanced manufacturing, technological innovation, and human capital. For global investors, this is a clear indication that the world’s second-largest economy is attempting to engineer a soft landing after a turbulent year, creating a compelling setup for risk-on assets in the Asia-Pacific region.

The immediate beneficiary of China’s renewed commitment to growth is the industrial commodities complex. Recent data has been mixed, with China’s official manufacturing PMI for November 2025 slipping into contractionary territory at 49.0. However, the promise of state-backed investment creates a floor for demand, specifically for steel-making ingredients.

We are already witnessing this sentiment translate into price action. Iron ore prices have rallied significantly in recent weeks, stabilising around $138 per ton. As Australia’s premier export, the price of iron ore shares a high positive correlation with the AUD. When Chinese factories hum, Australian miners export more, improving Australia's terms of trade and driving demand for the local currency. The fiscal push into infrastructure and high-tech manufacturing ensures that this demand remains robust heading into 2026, offsetting fears of a deeper industrial slowdown.

While China provides the demand-side catalyst, the monetary policy backdrop in Australia adds a layer of yield support for the currency. The Reserve Bank of Australia (RBA) finds itself in a divergent position compared to other central banks that may be looking to cut rates. Inflation in Australia remains stubbornly sticky, running at 5.2 per cent in the third quarter of 2025.

To combat these price pressures, the RBA has held its cash rate steady at 4.10 per cent. This hawkish posture maintains a yield advantage for the Aussie dollar. In the world of foreign exchange, capital gravitates towards higher yields. The combination of a central bank committed to fighting inflation and a major trading partner (China) committing to stimulus creates a "double-barrelled" bullish thesis for the AUD/USD pair, which recently ticked up to trade around 0.6716.

Given the confluence of Chinese fiscal support and Australian monetary tightness, the outlook for the Australian dollar appears constructive for the early months of 2026. The current environment suggests that the "China proxy" trade is back in play.

For sophisticated investors, this macroeconomic divergence presents opportunities in the derivatives market. With volatility relatively low, premiums for AUD/USD call options expiring in late January or February 2026 remain reasonably priced. This strategy allows traders to capture potential upside from the stimulus narrative while defining risk parameters. However, vigilance is required. The market will need to see concrete details of Beijing’s spending plans; any hesitation from Chinese policymakers or a sudden reversal in commodity prices would necessitate a rapid reassessment of this bullish stance.