The latest Caixin data, released on Tuesday, revealed a decline in China’s Services Purchasing Managers’ Index (PMI) to 50.7 in April, a decrease from the 51.9 recorded in March. This figure indicates a slowing in the expansion of the services sector, a crucial component of the Chinese economy.
The reported figure fell short of market expectations by a considerable margin, with economists having forecast a reading of 51.7 for the period. This deviation from anticipated performance has raised concerns about the strength of China’s economic recovery and its potential impact on global markets. The miss suggests underlying weaknesses in the services sector that warrant further scrutiny.
AUD/USD reaction to China’s Services PMI
The Australian Dollar (AUD), often considered a proxy for the Chinese economy due to Australia’s significant trade relationship with China, experienced immediate downward pressure following the data release. The AUD/USD pair declined by 0.30% on the day, trading at 0.6450 as of this writing. This movement reflects investor apprehension regarding the implications of the weaker-than-expected Chinese PMI data for the Australian economy, particularly its export sector. Further declines could be observed if the negative sentiment persists.
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). Higher interest rates tend to attract foreign investment, increasing demand for the AUD. 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. The RBA’s monetary policy decisions are closely watched by currency traders for signals about the future direction of the AUD.
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. The magnitude of this impact depends on the perceived strength and sustainability of Chinese economic growth.
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. Fluctuations in iron ore prices can lead to volatility in the AUD, particularly against currencies of countries that are major importers of iron ore.
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. A consistently positive trade balance indicates a strong export-oriented economy, which typically supports a higher currency valuation.
