Australian Dollar remains under pressure as PMI slows
- Australia’s manufacturing, services, and composite PMIs all eased in September, weighing heavily on the AUD.
- The US Dollar gains strength as the Federal Reserve signals potential additional interest rate hikes this year.
- Markets price in nearly an 89% chance of a December Fed rate hike ahead of US PMI data.
AUD/USD loses ground for the third consecutive day, trading around 0.7110 during Asian hours on Wednesday. The Australian Dollar (AUD) remains subdued against the US Dollar (USD) following the release of September's preliminary S&P Global Purchasing Managers' Index (PMI) data for Australia, keeping the AUD/USD pair under pressure.
The slowdown was broad-based across key sectors: Manufacturing fell into contraction territory at 49.3, down from 52.0 previously, while the Services PMI eased to 51.4 from 53.2. Consequently, Australia’s Composite PMI dropped to 50.8 from its prior reading of 52.7.
Compounding the pressure on the AUD/USD pair is a strengthening US Dollar (USD), driven by the Federal Reserve's hawkish policy outlook. The US central bank recently raised its benchmark interest rate target by 25 basis points to the 3.75%–4.00% range, with policymakers signaling another potential rate hike before the end of the year.
Financial markets are actively pricing in this trajectory, with the CME FedWatch Tool indicating nearly an 89.2% probability of a December rate increase as traders turn their attention to the upcoming preliminary US PMI data release later on Wednesday.
Collins flags higher inflation risks, backing a more restrictive Fed stance
Fed’s Collins delivered a notably more hawkish tone, with an FXS Speechtracker score of 8.1 versus a historical average of 6.6, underscoring stronger conviction behind recent policy moves. The emphasis on supporting last week’s rate hike, increased likelihood of inflation staying notably above 2%, and a “somewhat more restrictive” federal funds rate signals a clear bias toward maintaining tighter conditions, especially now that the labor market is seen on a better footing. Overall, the speech reinforces the Fed’s willingness to prioritize a timely return to price stability after an extended period of too-high inflation, a backdrop typically supportive of the Dollar and yields.
The FXS Fed Sentiment Index rose by 0.53 points to 150.49, firmly in hawkish territory and consistent with the elevated FXS Speechtracker reading. This upward move in the FXS Fed Sentiment Index confirms that Collins’ remarks have incrementally strengthened market expectations for sustained restrictive policy, a configuration that tends to underpin the Dollar against lower-yielding peers.
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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