AUD remains 2022's leaderBut has retreated over recent daysDownside remains limitedAs China promises new stimulusAnd labour market remains 'tight'

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The Australian Dollar remains the best performing major currency of 2022 and is expected by analysts to remain buoyant amidst news China is to engage fresh stimulus to boost its economy while the domestic labour market remains tight, according to just-released data.

Chinese authorities responded to an ongoing growth slowdown by announcing midweek that further support for Australia's largest export market was forthcoming.

"In China, the prospect of an imminent RRR cut has increased after the state-run television reported that the State Council said China will use monetary tools including the RRR in a timely manner," says FX strategist Terence Wu at OCBC.

China State Council pledged to stimulate economic activity by signalling a cut to the cash banks would be required to hold as reserves, therefore freeing them up to lend more.

The cabinet said in a meeting chaired by Chinese Premier Li Keqiang that big Chinese banks should gradually lower their reserve requirement ratio, which is the amount of deposits commercial banks have to park at the central bank.

The moves come as China responds to slowing growth caused by the severe lockdowns imposed in some of the country's regions and cities over recent weeks, the most notable being that impacting Shanghai.

China's central bank last cut the RRR in December, days after Premier Li flagged the easing move in the State Council meeting.

The cut in December released 1.2 trillion yuan ($188.50 billion) worth of liquidity into China's banking system.

"Given all the economic weakness due to covid lockdown, the market not only expects an imminent cut to the reserve requirement ratio, but also sees that the benchmark lending rates, i.e. the loan prime rate, to be lowered next week," says Hao Zhou, Senior Economist at Commerzbank.

News of incoming Chinese stimulus is typically supportive of the Australian Dollar as China accounts for the majority of Australia's commodity exports.

Australia is running a sizeable current account surplus as exports exceed imports, but this surplus will require ongoing demand from China to be sustained.

"Our view for a while is the PBoC will cut the RRR by a cumulative 100bp over Q2 and Q3 2022. Further easing of monetary policy will help China’s economic recovery which is ultimately a positive for CNH and AUD in our view," says Joseph Capurso, a currency strategist at Commonwealth Bank of Australia.

The Australian Dollar was nevertheless softer on Thursday following the release of domestic labour market data that came in below expectations.

Australia saw employment increase by 17.9K in March, which was less than the 40.0K the market expected and down sharply on 77.4K reported in February.

The unemployment rate remained at 4.0% said the ABS, whereas markets were looking for a fall to 3.9%.

Above: Australia unemployment rate, seasonally adjusted: ABS.

Although figures disappointed - and could have mechanically fed into a lower Aussie Dollar via trading algorithms - the numbers nevertheless convey an economy with a strong labour market.

This should keep wage pressures elevated and allow the Reserve Bank of Australia (RBA) to pursue a series of interest rate hikes, that ultimately confer some yield support to the Aussie Dollar.

"The combination of low unemployment and underemployment points to a marked pick-up in wages growth over this year and next," says David Plank, an economist at ANZ.

"Wages growth tends to be persistent. We think this will be a key factor in eventually driving the RBA’s cash rate target above 3%, though we don’t see this happening nearly as quickly as the market is pricing," he adds.

Diana Mousina, Senior Economist at AMP Investments says the RBA should raise interest rates in June by 0.15%, followed by 25 basis point hikes in August, November and December this year.

"There is the risk of an earlier hike in May, but we think the central bank is not in a hurry to lift rates given that inflation is not out of control (like it is arguably in the US) and would prefer to wait until after the election (in May) and for the March quarter wages data (released on 18 May)," says Mousing.