AUD/USD loses momentum below 0.6550 on disappointing Chinese PMI
- AUD/USD weakens to below 0.6550 in Monday’s early European session.
- China’s RatingDog Manufacturing PMI fell to 49.9 in November, weaker than expected.
- US rate futures have priced in around an 87% probability of a December rate cut.
The AUD/USD pair loses ground to around 0.6540, snapping the six-day winning streak during the early European session on Monday. The Australian Dollar (AUD) retreats from two-week highs against the Greenback following the weaker-than-expected Chinese economic data.
Data released by RatingDog on Monday showed that China's Manufacturing PMI unexpectedly fell to 49.9 in November from 50.6 in October. This figure came in below the market consensus of 50.5. A reading above the 50 benchmark level suggests an expansion, while one below that indicates contraction. The downbeat Chinese undermine the China-proxy Aussie, as China is a major trading partner for Australia.
On the other hand, hotter-than-expected Australian inflation tempers expectations of the Reserve Bank of Australia (RBA) rate cut, which might help limit the AUD’s losses. RBA Governor Michelle Bullock emphasized the central bank's unanimous decision to hold the cash rate at 3.60% and that a rate cut was not discussed at that time.
On the USD’s front, dovish comments from Federal Reserve (Fed) officials and softer US economic data have reinforced expectations that the US central bank will ease policy in December. Futures imply an 87% chance of a rate cut, according to the CME's FedWatch tool.
Traders will keep an eye on the US November ISM Manufacturing Purchasing Managers Index (PMI) report, which is due later on Monday. On Friday, the attention will shift to the US Personal Consumption Expenditures (PCE) inflation figures for further cues on the Fed's policy path.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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