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The Australian Dollar's RBA-inspired rally means it has broken its linkage with the Chinese Yuan, for now.

AUD is the week's top-performing currency courtesy of the Reserve Bank of Australia's (RBA) decision to hike interest rates a further 25 basis points and accompanying guidance that further rate hikes are likely, underscoring Australian yields and AUD.

The domestic developments boosted Australian yields and supported the Aussie, allowing it to momentarily break free of global factors which are typically a strong driver.

Indeed, the below chart confirms a strong correlation between the AUD and China's Yuan (an obvious proxy for exposure to the Chinese economy). The vertical line falls on the date of the RBA decision and confirms a break in the AUD and CNY relationship:

Above: AUD/USD (top) and USD/CNY.

The chart's overwhelming message is nevertheless clear: what happens in China matters greatly for the commodity-exporting Australian economy and its currency.

The fortunes of the Yuan tend to pull the Australian Dollar lower and higher with the most recent trend of weakness resulting in a multi-year high for the Pound to Australian Dollar exchange rate.

The Yuan's decline extended last week, but the Aussie has gone higher. How long will this decoupling last, and does it suggest the Australian Dollar's strength has limits?

Given the enduring strength of the CNH and AUD relationship, a reversion to trend is likely, suggesting the Aussie is indeed potentially at risk of a reversion lower.

When this will happen, is of course harder to call, but it should be borne in mind by those selling Aussies.

Alex Loo, FX and Macro Strategist at TD Securities, says the People's Bank of China may favour some short-term underperformance in the domestic currency in the wake of softer China economic data and a firm USD.

The Yuan is set to end the week on a soft note owing to inflation data out of China that revealed CPI came in at 0.2% year-on-year.

"A combination of negative seasonal price pressures and loss of momentum in activity over the month limiting pricing power, dampened inflation. Further weakness in the industrials' commodity complex, oil and PMI input prices, suggested even more downward pressure on PPI though," says TD Securities in a regular currency briefing out Friday.

"The soft inflation data highlights growing pressure on the economy. Benign inflation taken together with softer activity data point to the potential for more monetary stimulus, and we think this will likely take the form of a further RRR cut soon. Overall we don't see much scope for other stimulus measures but continue to expect CNH underperformance in the near term," adds the note.

Any upcoming Chinese stimulus announcements could result in near-term CNH outperformance, which would bolster the AUD's RBA outperformance further.

However, it is unclear as to just how significant a boost any stimulus will be and whether it will endure, particularly given the limited impact of previous stimulus attempts in 2023.

The China backdrop for the Aussie Dollar, therefore, looks to remain unsupportive for a while yet.