China is the big story - the second biggest economy in the world and on its way to become the biggest (according to one way of measuring it, at least). So it's only natural that foreign exchange traders should want to get in on this Next Big Thing and trade the up-and-coming country's up-and-coming currency as well so that they too can ride the wave.
China's currency, the yuan (CNY), only partially reflects what goes on in China's economy. It doesn't trade freely; the Chinese government sets an official rate for it every day and only allows it to fluctuate 1 percent around that level every day. In fact, it doesn't even vary that much; the average difference between the high and the low price last year was a mere 0.15 percent.
However, there is a version of the yuan (CNH) that trades freely overseas. The government doesn't fix a value for that, but as its value never strays that far from the value of the yuan, it too is relatively stable. The result is that the currency, whether traded on the mainland or overseas, only reacts modestly to Chinese economic indicators and other news that would be market-moving in other, freely traded currencies.
That's why the market has turned to the Australian dollar as a proxy for China. The Australian economy is almost tied to the hip to China – about one-third of its exports go to Greater China and, perhaps more importantly, two-thirds of its exports are products where China sets the price: coal, iron ore, wool, metals, etc. The mining and mining-related sector alone accounts for 19 percent of gross domestic product, while most of the growth of the country comes from the mining and agricultural sectors, which are now aimed squarely at the China market. With the fate of the Australian economy tied so closely to China, it should be no surprise that people who trade the Aussie dollar do so with one eye on China.
(Read More: Is This the Start of China's Tightening Cycle?)
The following graphs tell the story. They compare the level of the Aussie dollar versus the U.S. dollar against an "economic surprise index," that measures the difference between the market's forecasts of economic indicators and the actual number. A rising index shows that the country's data are turning out better than the market had expected.