Australian Dollar steadies after higher China’s Manufacturing PMI
- The Australian Dollar halts its losses after the release of the higher-than-expected China’s Manufacturing PMI.
- Australia’s Manufacturing PMI dropped for the fifth consecutive month to 47.2 in June.
- The US Dollar declines as recent inflation data raises the odds of the Fed’s rate cuts in 2024.
The Australian Dollar (AUD) holds ground as the Caixin Manufacturing PMI from China increased to 51.8 in June, defying the expectations of a decline to 51.2 from May’s 51.7. Any change in the Chinese economy could impact the Australian market as both nations are close trade partners.
The AUD received pressure as investors’ sentiment soured following data indicating that Australia's June manufacturing PMI contracted at its fastest rate since May 2020. Market focus now turns to the Reserve Bank of Australia's (RBA) upcoming policy meeting minutes on Tuesday for insights into the monetary policy direction.
The US Dollar (USD) depreciates due to the heightened expectations of the US Federal Reserve’s (Fed) deducting interest rates in 2024. The CME FedWatch Tool indicates that the likelihood of a Fed rate cut in December by 25 basis points has increased to nearly 32.0%, up from 28.7% a week earlier.
Daily Digest Market Movers: Australian Dollar holds ground after higher China’s PMI
- The Judo Bank Australia Manufacturing PMI dropped for the fifth consecutive month to 47.2 in June from 49.7 in May. This decline is the fastest deterioration since May 2020.
- Australia’s 10-year government bond yield surged above 4.4%, as a hot inflation reading fueled fears that the Reserve Bank of Australia might raise interest rates again in the next meeting in August.
- NBS China’s Manufacturing PMI remained at 49.5 in June, consistent with market forecasts and marking the second consecutive month at this level. This result indicates the fourth instance of contraction. Meanwhile, the Non-Manufacturing PMI fell to 50.5 from the previous reading of 51.1, below market expectations of 51.0. Despite marking the 18th consecutive month of expansion in the service sector, this is the slowest growth rate since last December.
- On Friday, the US Bureau of Economic Analysis reported that US inflation eased to its lowest annual rate in over three years. The US Personal Consumption Expenditures (PCE) Price Index increased by 2.6% year-over-year in May, down from 2.7% in April, meeting market expectations. Core PCE inflation also rose by 2.6% year-over-year in May, down from 2.8% in April, aligning with estimates.
- The Reserve Bank of Australia’s (RBA) Deputy Governor Andrew Hauser. Hauser said it would be a “bad mistake” to formulate policy in response to a single inflation report. He emphasized that there is still a suite of economic data to come that will require detailed analysis, per Bloomberg.
- Last week, the Australian Bureau of Statistics showed that the monthly Consumer Price Index (CPI) increased by 4.0% in the year to May 2024, up from 3.6% in April and exceeding market forecasts of 3.8%. This marks the highest level since November 2023.
Technical Analysis: Australian Dollar edges lower toward 0.6650
The Australian Dollar trades around 0.6670 on Monday. The daily chart analysis indicates a neutral bias for the AUD/USD pair as it consolidates within a rectangle formation. The 14-day Relative Strength Index (RSI) is positioned slightly above the 50 level, suggesting a potential for bullish bias.
The AUD/USD pair may encounter resistance near the upper boundary of the rectangle formation around 0.6690, followed by the psychological level of 0.6700. Additional resistance is seen at 0.6714, the highest level since January.
On the downside, the AUD/USD pair finds support around the 50-day Exponential Moving Average (EMA) at 0.6621. A break below this level could lead the pair to test the lower boundary of the rectangle formation near 0.6585.
AUD/USD: Daily Chart
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.
Economic Indicator
RBA Meeting Minutes
The minutes of the Reserve Bank of Australia meetings are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. They also record the votes of the individual members of the Committee. Generally speaking, if the RBA is hawkish about the inflationary outlook for the economy, then the markets see a higher possibility of a rate increase, and that is positive for the AUD.
Read more.Next release: Tue Jul 02, 2024 01:30
Frequency: Weekly
Consensus: -
Previous: -
Source: Reserve Bank of Australia
The Reserve Bank of Australia (RBA) publishes the minutes of its monetary policy meeting two weeks after the interest rate decision is announced. It provides a detailed record of the discussions held between the RBA’s board members on monetary policy and economic conditions that influenced their decision on adjusting interest rates and/or bond buys, significantly impacting the AUD. The minutes also reveal considerations on international economic developments and the exchange rate value.
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