AUD/USD holds positive ground above 0.6900 ahead of Chinese PMI data
|- AUD/USD trades in positive territory for the third consecutive day near 0.6910 in Monday’s early Asian session.
- US headline PCE rose less than expected in August.
- China’s stimulus measures and the hawkish stance of the RBA underpin the Aussie.
The AUD/USD pair extends its upside to around 0.6910 during the early Asian session on Monday. The rising bets for another oversized interest rate cut by the Federal Reserve (Fed) in November weigh on the US dollar (USD). The Chinese Purchasing Managers Index (PMI) reports for September are due later on Monday.
The US inflation data, as measured by the Personal Consumption Expenditures (PCE) Price Index, eased more than expected to 2.2% YoY in August, paving the way for the US central bank to cut interest rates again in November, which drags the US Dollar (USD) lower broadly. On a monthly basis, the PCE Price Index increased by 0.1%, in line with the consensus. Meanwhile, the core PCE Price Index, which excludes the more volatile categories of food and energy, climbed by 2.7% YoY in the same period, matching market expectations.
University of Michigan's Consumer Sentiment Index came in better than the estimations, rising to 70.1 in September from 66.0 in August. Investors are now pricing in nearly 52.8% odds of a 50 basis points (bps) interest rate cut in November, while the chance of a smaller quarter-point move stands at 47.2%, according to the CME FedWatch Tool.
On the other hand, fresh China’s stimulus measures continue to fuel the risk-on rally and boost the China-proxy Australian Dollar (AUD). Additionally, the hawkish stance of the Reserve Bank of Australia (RBA) contributes to the Aussie’s upside. The RBA kept its cash rate at 4.35% for a seventh consecutive meeting and stated that the policy would need to stay restrictive to ensure inflation slowed.
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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