(Bloomberg) -- Traders hoping the Australian dollar will strengthen beyond a closely tracked level are set to be disappointed as optimism over China’s rebound fades and the local economy falters.

The currency has risen over 2% in May, potentially heading for its best month this year. However, it may struggle to rally further as Australia will be reluctant to raise interest rates and China continues to underwhelm with its economic support, analysts say.

Such headwinds signal that the Aussie will likely once again fail to break through the key resistance of 69 US cents and reach its post-pandemic high, a level that it didn’t manage to surpass three times last year, according to InTouch Capital Markets. The currency closed at 66.28 US cents on Friday.

“A number of stars would have to line up” for the Aussie to test 69 cents, said Richard Grace, a senior strategist at InTouch in Sydney. “It’s worth noting that it has struggled to breach that level when tested,” he said.

When the Aussie tested the 69-cent level last year, the currency was weighed down by a drop in commodity prices on concerns about China’s economy and a hawkish Federal Reserve which supported the dollar. 

This time, commodities are slipping from highs, while an index tracking the greenback’s strength notched its best week in more than a month as Fed officials signaled inflation has to ease more before they’ll consider a rate cut.

Read More: Minutes Show Officials Rally Around Higher-for-Longer Rates

Traders also see the RBA removing its hawkish bias as consumer spending slumps and cracks emerge in the labor market. Swaps data shows the central bank will remain on hold for the remainder of the year, marking a rapid reversal after pricing showed earlier this month there was an even chance of a rate hike in August, following a hotter-than-expected inflation print.

What Bloomberg Economics Says:

“High interest rates and rising prices for healthcare, education and housing are squeezing out retail purchases. Consumer spending will probably stay weak, with the Reserve Bank of Australia likely to keep rates on hold into 2H” - James McIntyre, economist 

Still, the currency is unlikely to slump from here as it remains supported by non-dollar crosses, while short bets will be pared due a central bank that may be among the last to cut interest rates. Although the Aussie will “struggle to rally significantly,” it may finish the year at 68 US cents as sentiment toward China starts to stabilize, said David Forrester, a senior strategist at Credit Agricole CIB in Singapore.

Here are the key Asian economic data this week:

  • Monday, May 27: Hong Kong trade data, China industrial profits
  • Tuesday, May 28: Australia monthly retail sales, South Korea retail sales
  • Wednesday, May 29: Australia monthly CPI, NZ business confidence
  • Thursday, May 30: RBA Assistant Governor (Economic) Sarah Hunter speaks, Taiwan 1Q GDP, NZ building permits
  • Friday, May 31: Japan retail sales and industrial production, Tokyo CPI, China PMIs, Thailand BoP current account balance, India 1Q GDP

--With assistance from David Finnerty.

©2024 Bloomberg L.P.