Australian Dollar little changed amid weak PMI data and RBNZ rate hike bets

October PMI signals the first private-sector contraction since May, but AUD remains resilient.
45% RBNZ rate hike probability follows Andrew Hauser's warning of a deteriorating inflation outlook.
AUD/USD faces a potential ceiling as recovering US Treasury yields underpin the US Dollar.

0.7020 is the level around which AUD/USD is trading in early European hours on Friday. The pair is holding steady after a modest decline the previous day. The Australian Dollar (AUD) remains stable following preliminary Purchasing Managers' Index (PMI) figures from S&P Global. The October Composite PMI from S&P Global fell to 47.7, against 51.3 in September. This was the weakest reading since March and signalled the first decline in private-sector activity since May.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

At 49.7 in October, the Manufacturing PMI edged above September's 21-month low of 49.6 but still indicated a second consecutive month of contraction. The Services PMI dropped from 51.9 in September to 47.8 in October, its weakest level since March and first contraction since May. New business continued to expand, although its growth slowed clearly.

Comments by Reserve Bank of Australia (RBA) monetary policy board member Andrew Hauser have led traders to increase bets on an RBA rate rise. Speaking on Wednesday, Hauser described the inflation outlook for the coming months as "materially worse". The Guardian reported that the probability of a November policy meeting rate hike rose to 45%, from 30% before his remarks. Such a move would be the year's fifth increase, taking the Official Cash Rate (OCR) target to 4.85% from 4.6%, the highest since the global financial crisis.

A recovering US Dollar (USD), however, could limit further AUD/USD gains. On Friday, the US 10-year Treasury yield climbed back towards 4.98%. It had dropped more than 10 basis points to a one-month low the previous day. Safe-haven demand had earlier put upward pressure on US bond prices as the sell-off in technology and artificial intelligence stocks intensified. With concerns mounting over the sustainability of AI investment, a major driver of US economic growth, financial markets have also reduced expectations for additional Federal Reserve rate rises.

Australian Dollar: Key Questions

Australian Dollar: Main Market Drivers

Interest rates set by the Reserve Bank of Australia (RBA) rank among the strongest influences on the Australian Dollar (AUD). Australia's abundant resources also make the price of iron ore, its largest export, a key driver. Other influences include the economic health of China, Australia's biggest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor sentiment matters too: demand for riskier assets, known as risk-on, supports AUD, while a preference for safe havens is described as risk-off.

RBA Decisions and Their Effect on AUD

By setting the interest rate at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) affects the Australian Dollar (AUD). That rate feeds through to borrowing costs across the wider economy. The RBA's central objective is stable inflation of 2-3%, pursued through increases or reductions in interest rates. Rates that are relatively high compared with those of other major central banks support AUD; relatively low rates have the reverse effect. Quantitative easing and tightening are additional tools for influencing credit conditions. Easing is negative for AUD, whereas tightening is positive.

China's Economy: Implications for AUD

As Australia's largest trading partner, China has a substantial influence on the Australian Dollar (AUD). A strong Chinese economy buys more Australian raw materials, goods and services, increasing demand for AUD and raising its value. When Chinese growth falls short of expectations, the reverse applies. Surprises in China's growth figures, whether positive or negative, therefore often feed directly into the Australian Dollar and its currency pairs.

Iron Ore Prices and the Australian Dollar

At $118 billion annually, according to 2021 data, iron ore is Australia's largest export, with China its main destination. Its price can therefore influence the Australian Dollar. Rising iron ore prices generally lift AUD by increasing overall demand for the currency; falling prices have the reverse effect. Higher prices also tend to improve the likelihood of an Australian trade surplus, providing further support for AUD.

Trade Balance: A Driver of AUD Value

Another influence on the Australian Dollar is the trade balance: export earnings minus import expenditure. Strong overseas demand for Australian exports can raise the currency's value when purchases by foreign buyers generate more demand than is offset by Australia's spending on imports. A positive net trade balance therefore supports AUD, while a negative balance has the reverse effect.