- AUD/USD trades stronger around 0.6770 in Monday’s early Asian session.
- The US Fed's closely watched inflation measure rose 2.5% YoY in July.
- China's NBS Manufacturing PMI declined to 49.1 in August; Non-Manufacturing PMI rose to 50.3 in the same period.
- Chinese August Caixin Manufacturing PMI will be released on Monday, which is expected to improve to 50.0 vs. 49.8 prior.
The AUD/USD pair posts modest gains near 0.6770 after retreating from Friday’s high of 0.6815 during the early Asian session on Monday. However, the firmer US dollar after the US July's Personal Consumption Expenditures (PCE) Index might drag AUD/USD lower. The release of US Nonfarm Payrolls (NFP) for August on Friday will be in the spotlight and might offer some hints about the size and pace of US interest rate reduction by the US Federal Reserve (Fed).
Data released by the US Bureau of Economic Analysis on Friday showed that the US headline Personal Consumption Expenditures (PCE) Price Index rose 2.5% YoY in July, compared to the previous reading of 2.5%, softer than the estimation of 2.6%. The core PCE, which strips out volatile food and energy prices, climbed 2.6% YoY in July versus 2.6% prior, below the consensus of 2.7%.
The PCE reading may not have been dovish enough to convince the Fed to start with a 50 basis points (bps) cut, lifting the Greenback. The report comes with the market's pricing in nearly a 70% probability of the Fed cutting rates by 25 bps in September, while the chance of the Fed cutting rates by 50 bps is 30%, according to the CME FedWatch Tools.
On the other hand, the monetary policy divergence between the dovish Fed and the hawkish Reserve Bank of Australia (RBA) might limit the pair's downside in the near term. The RBA deputy governor Andrew Hauser stated on Friday that the Australian central bank will not follow the Fed and cut interest rates this year as inflation remains high and the 4.35% cash rate is not very high by global standards.
Elsewhere, the Chinese NBS Purchasing Managers' Index (PMI) was mixed in August. The country’s Manufacturing PMI declined to 49.1 in August, compared to 49.54 in the previous reading, missing the market expectation of 49.5. Meanwhile, Non-Manufacturing PMI improved to 50.3 in August versus 50.2 prior, above the 50.0 estimated.
Investors will shift their attention to the Chinese Caixin Manufacturing PMI for August, which is due on Monday. The weaker-than-expected outcome could drag the China-proxy Australian Dollar (AUD) lower as China is a major trading partner to Australia.
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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