By: Hillel Fuld
The AUD declined on Monday after China's central bank increased rates over the weekend, and some analysts say chances of more tightening by China could cause investors to sell the Aussie following the year-end holidays.
While the market was expecting more tightening by Beijing, the timing was somewhat of a surprise, as there had been skepticism whether it would increase rates before the end of the year.
Saturday's rise in interest rates by China's central bank is the second in just over a two month period, underscoring its desire to dampen domestic demand and get price pressures under control. Australia has benefited from strong Chinese demand for iron and other commodities.
The news knocked the UD down 0.3 percent in thin, erratic trade, with many of the region's financial centers on holiday, including Sydney and Hong Kong.
"China looks set to tighten its policy further in the next year, which will have a negative impact on the Aussie given Australia's strong economic ties with China. When many investors come back from holiday next week they may start the year by selling the Aussie," said Yuki Sakasai, a forex strategist at Barclays Capital.
The Australian dollar declined to approximately $1.0025 from around $1.0053 late on Friday and a six-week peak of $1.0067 hit the day before. But an increase in Shanghai shares helped pare losses by the Aussie, which still boasts a gain of more than 11 percent thus far this year.