AUD/USD Slips Below 0.70 as China Weakness Tests RBA Support

AUD/USD began the new week below 0.70, forcing traders to reconsider a rally that had carried the Australian dollar higher for three consecutive weeks.

The pair slipped 0.1% to around 0.6975 during early Asian trading on 20 July. The immediate pressure came from a stronger US dollar and deteriorating risk sentiment as the conflict between the United States and Iran intensified. Brent crude rose 3.3% to $90.97 per barrel, while investors reduced exposure to currencies that normally perform better when global risk appetite is improving.

The Australian dollar is now caught between two very different forces.

Australia’s interest rates remain high, and the Reserve Bank of Australia has not ruled out another increase. That provides the currency with a yield advantage.

However, China’s economy is losing momentum, Australian export performance has weakened, and renewed geopolitical stress is encouraging demand for the safer US dollar.

The question is no longer whether the Australian dollar has supportive factors. It clearly does. The more important question is whether those factors are strong enough to compensate for a deteriorating external environment.

Question One: Is the Australian dollar still supported by interest rates?

Yes, but the support is no longer as straightforward as it appeared earlier in the year.

The RBA kept the cash rate at 4.35% in June after raising it three times during the first half of 2026. The central bank said inflation remained too high and warned that it would raise the cash rate again if necessary. Its next scheduled monetary policy decision is on 11 August.

A 4.35% cash rate makes the Australian dollar one of the higher-yielding major currencies. That can attract capital when investors are willing to hold riskier assets and borrow in currencies with lower interest rates.

This rate advantage has helped prevent a larger decline in AUD/USD, particularly as softer US inflation data reduced expectations of an immediate Federal Reserve increase.

But high interest rates are not automatically positive for a currency.

The RBA has already acknowledged that financial conditions are restrictive. Mortgage payments have risen, housing conditions have softened and consumer spending is beginning to slow. The central bank’s June minutes also noted that labour-market data had weakened and that the effect of the earlier rate increases was beginning to spread through the economy.

Australia’s first-quarter GDP increased by only 0.3%, below the 0.5% expected by economists. Household discretionary spending rose just 0.1%, while higher borrowing and energy costs continued to pressure consumers. The RBA expects annual growth to slow to around 1.3% by the end of 2026.

The current rate advantage therefore comes with a cost.

If the RBA remains hawkish because domestic demand is strong, higher rate expectations can support the Australian dollar for an extended period.

If it remains hawkish mainly because imported energy costs are keeping inflation high while economic activity weakens, the currency response may be much less positive.

The Australian dollar is currently closer to the second situation.

Question Two: Is China still providing a reliable reason to buy AUD?

Not in the way it once did.

China’s economy expanded 4.3% year on year in the second quarter, down from 5.0% in the first quarter. Growth for the first half of 2026 was 4.7%. The headline figure does not indicate a collapse, but the composition of growth is more concerning for currencies and commodities linked to Chinese domestic demand.

China’s industrial output increased by 5.4% during the first half of the year, while high-technology manufacturing grew by 13.3%. Exports also remained strong, reflecting continued investment in artificial intelligence, electronics, industrial equipment and other strategic sectors.

Those figures help explain why the Australian dollar has not reacted more negatively.

China is still producing, exporting and investing in selected industries. Demand for some raw materials has therefore remained more resilient than weak consumer and property data might suggest.

However, the parts of the Chinese economy that traditionally create broad demand for Australian commodities remain under pressure.

Retail sales of consumer goods increased by only 1.3% during the first half of 2026. Fixed-asset investment declined by 5.7%, private investment fell by 8.5% and real-estate development investment dropped by 18.0%. Sales of newly built commercial buildings also continued to decline.

This is a quality problem rather than simply a GDP problem.

A Chinese economy driven by exports, artificial intelligence and state-supported high-technology manufacturing does not necessarily generate the same demand for steel, residential construction materials and consumer imports as an economy led by property development and household spending.

For AUD/USD, that distinction matters more than the headline GDP number.

The Australian dollar has historically benefited when faster Chinese growth increases demand for a wide range of Australian resources. In the current cycle, China is still growing, but the growth is concentrated in areas that may provide less direct support to Australia’s traditional export structure.

Expectations of additional Chinese stimulus could still lift the Australian dollar. However, the details will matter.

Measures aimed primarily at advanced manufacturing, technology investment and export capacity may support market sentiment without significantly improving demand for Australian raw materials.

Stronger household, infrastructure or property support would have a more direct effect on the Australian dollar.

Question Three: Is iron ore confirming China’s weakness?

Only partly.

The commodity data are not weak enough to support a simple bearish conclusion.

BHP reported record annual iron ore production of 291.2 million metric tons from its Western Australian operations. Its average realised iron ore price increased by 3% to $84.56 per wet ton during the 2026 financial year, despite difficult pricing negotiations with China’s state-backed buyer.

These figures indicate that Chinese economic weakness has not yet caused a broad collapse in iron ore volumes or realised prices for Australia’s largest producers.

BHP is also forecasting Western Australian iron ore production of between 286 million and 298 million tons in the 2027 financial year. That suggests the company does not currently expect an immediate structural breakdown in demand.

However, Australia’s broader trade data present a less comfortable picture.

The country recorded a goods trade deficit of A$3.0 billion in May, compared with a surplus of A$1.4 billion in April. Exports dropped 6.9%, including a 9% decline in iron ore exports and a 35% fall in non-monetary gold exports. Imports increased by 2.6%.

One month of weak exports does not establish a lasting trend. Shipment timing, weather, prices and temporary operational disruptions can all produce large monthly changes.

Nevertheless, the figures show why high commodity production alone cannot guarantee a stronger Australian dollar.

The currency benefits most when export prices, export volumes and global demand improve together. At present, those three elements are not moving in the same direction.

Iron ore is therefore offering the Australian dollar some protection, but not a strong enough signal to outweigh every negative development from China.

Why higher oil prices are not helping AUD/USD

Australia is a major commodity exporter, so it may appear reasonable to assume that higher global energy prices should support its currency.

The current market reaction shows why that assumption is too simple.

Brent crude rose above $90 per barrel as conflict in the Middle East intensified, but the Australian dollar weakened rather than strengthened. Investors focused on the wider consequences of the conflict: weaker global risk appetite, higher inflation, possible disruption to trade and stronger demand for the US dollar.

Higher fuel prices are also a domestic cost for Australian households and businesses.

The RBA has warned that global oil-supply disruption is adding directly to inflation and beginning to affect the prices of other goods and services. At the same time, higher energy costs are reducing household purchasing power and contributing to slower consumption.

This creates an unfavourable policy combination.

The RBA may need to keep rates high to prevent energy inflation from becoming embedded, but households are already feeling the effect of previous rate increases. Australia could therefore face weaker growth without receiving the benefit of lower interest rates.

For the Australian dollar, an orderly rise in commodity demand can be positive. A geopolitical oil shock that damages confidence and raises domestic costs is much less supportive.

What does the move below 0.70 mean?

The 0.70 level is not an official economic boundary, but it has become an important test of the market’s confidence in the recent Australian dollar recovery.

AUD/USD had managed to complete three consecutive weekly gains before slipping to approximately 0.6975 on Monday. The move below 0.70 shows that investors are currently giving more weight to geopolitical risk and Chinese weakness than to Australia’s interest-rate advantage.

A quick recovery above 0.70 would suggest that the latest decline was mainly a temporary risk-off reaction.

For that to happen, markets would probably need at least one of the following developments:

Chinese authorities would need to provide credible stimulus aimed at domestic demand rather than only strategic industries.

Middle East tensions would need to ease enough to reduce demand for the US dollar.

Australian data would need to show that the economy can withstand a 4.35% cash rate without a sharper deterioration in employment and consumption.

Without one of those changes, attempts to move above 0.70 may continue to lose momentum.

A prolonged period below 0.70 would not automatically begin a major downtrend, but it would weaken the argument that the RBA’s policy stance is sufficient to keep the Australian dollar appreciating.

What could turn the Australian dollar higher?

The most constructive outcome would be a change in the composition of Chinese policy support.

China does not necessarily need to return to the property-driven growth model of the past. However, stronger support for household consumption, infrastructure activity and private investment would give investors more confidence that demand is spreading beyond exports and high-technology manufacturing.

A second supportive development would be evidence that Australian inflation is declining without a severe slowdown in employment or household spending.

That would allow the RBA to retain a relatively high interest rate while reducing fears that further tightening will damage the economy.

The third potential catalyst is a renewed decline in the US dollar.

Markets currently expect the Federal Reserve to leave rates unchanged on 29 July, with an implied probability of approximately 85.6%. However, some Fed officials continue to argue that another increase may be required because inflation remains persistent.

If US data reduces expectations of additional tightening while Australian expectations remain stable, AUD/USD could regain support even without a major improvement in China.

What would make the current weakness more serious?

The Australian dollar would face a more difficult environment if several negative signals begin to reinforce one another.

A further slowdown in Chinese investment would weaken the outlook for iron ore and other industrial commodities.

A sustained Australian trade deficit would reduce one of the economy’s traditional sources of currency demand.

Further increases in oil prices would raise Australia’s inflation costs and increase pressure on household spending.

A weaker labour market could then force investors to consider whether the RBA’s next move will eventually be a cut rather than another increase.

None of these developments alone guarantees a sustained AUD/USD decline. The risk would become more significant if they appeared together.

AUD/USD assessment

AUD/USD is not facing a single decisive bearish factor. Its problem is that several formerly supportive relationships are becoming less reliable.

Australia still offers high interest rates, but those rates are slowing domestic demand.

China is still growing, but its growth is concentrated in exports and high-technology production rather than property, consumption and private investment.

Iron ore production remains strong, but Australia’s monthly export performance has weakened.

Higher commodity prices may support selected Australian exporters, but the current oil shock is strengthening the US dollar and raising domestic inflation costs.

That makes the Australian dollar difficult to describe as either clearly undervalued or ready for a sustained rally.

A recovery above 0.70 would be more convincing if it were accompanied by broader Chinese stimulus, calmer geopolitical conditions or stronger Australian domestic data. Without those confirmations, the pair may continue to struggle whenever global risk appetite weakens.

The RBA is preventing the Australian dollar from losing all of its yield support. It is not, by itself, providing a complete reason to buy AUD/USD.