AUD/USD extends the rally to near 0.6550 ahead of China’s Caixin Manufacturing PMI release
- AUD/USD edges higher to around 0.6540 in Monday’s early Asian session.
- China's factory activity contracts in August
- Markets expect the Fed to cut the interest rate in the September meeting.
The AUD/USD pair extends its upside to near 0.6540 during the early Asian session on Monday. Traders ramp up bets for a US interest rate cut by the Federal Reserve (Fed) in the September meeting, which weighs on the US Dollar (USD). China’s Manufacturing Purchasing Managers Index (PMI) is due later on Monday.
Data released by China’s National Bureau of Statistics (NBS) on Sunday showed that the country’s Manufacturing Purchasing Managers' Index (PMI) rose to 49.4 in August from 49.3 in July. The reading came in weaker than the expectation of 49.5 and marked five consecutive months of decline. The lack of a more pronounced rebound in the manufacturing sector has raised the prospect of economic slowdown, which might undermine the China-proxy Aussie, as China is a major trading partner of Australia.
Additionally, the NBS Non-Manufacturing PMI climbed to 50.3 in August, versus 50.1 prior and in line with the market consensus. The report noted that extreme weather has disrupted construction and travel, and a worsening downturn in the property market has put an additional drag on activity.
US inflation, as measured by the Personal Consumption Expenditures (PCE), rose in July, indicating that US President Donald Trump’s tariffs are working their way through the US economy. However, markets expect the Fed to resume lowering its benchmark interest rate this month.
Fed Governor Christopher Waller on Thursday reiterated his support for a cut, saying he would entertain a larger move if labor market data continue weakening. The rising Fed rate cut bets and dovish remarks from Fed officials could drag the Greenback lower and act as a tailwind for the pair in the near term.
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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