Breaking: China’s October CPI inflation slows to 0.7% YoY, below 0.8% forecast

In China, the Consumer Price Index (CPI) rose by 0.7% year on year in October, following an increase of 0.9% in September, according to figures the National Bureau of Statistics of China released on Monday. Markets had expected a rise of 0.8% for the period.

Further updates to follow.

Australian Dollar: Key Questions Answered

Interest rates, commodities and sentiment drive the Australian Dollar

Among the main influences on the Australian Dollar (AUD) are interest rates set by the Reserve Bank of Australia (RBA). Australia's abundant natural resources also make the price of Iron Ore, its largest export, an important driver. Other factors include economic conditions in China, Australia's biggest trading partner, alongside domestic inflation, economic growth and the Trade Balance. Investor appetite for risk matters too: a preference for riskier assets (risk-on) supports the AUD, whereas a move towards safe havens is described as risk-off.

Reserve Bank of Australia policy shapes the Australian Dollar

By setting the interest rates at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) affects borrowing costs across the economy and, in turn, the Australian Dollar (AUD). Its primary objective is to keep inflation stable at 2-3%, raising or lowering rates to achieve this. Rates that are relatively high compared with those of other major central banks support the AUD; relatively low rates have the reverse effect. Credit conditions can also be influenced through quantitative easing or tightening. Easing is negative for the AUD, while tightening is positive.

Chinese economic performance influences the Australian Dollar

As Australia's largest trading partner, China has a substantial influence on the value of the Australian Dollar (AUD). A strong Chinese economy buys more Australian raw materials, goods and services, increasing demand for the AUD and lifting its value. When Chinese growth falls short of expectations, the reverse applies. Chinese growth figures that exceed or miss forecasts therefore often affect the Australian Dollar and its currency pairs directly.

Iron Ore prices help steer the Australian Dollar

At $118 billion annually, according to 2021 data, Iron Ore is Australia's largest export, with China its main destination. This makes Iron Ore prices a potential driver of the Australian Dollar. Rising prices generally lift overall demand for the currency and push the AUD higher, while falling prices have the opposite effect. Higher Iron Ore prices also tend to make an Australian Trade Balance surplus more likely, providing further support for the AUD.

Trade surpluses support the Australian Dollar

Another influence on the Australian Dollar is the Trade Balance: export earnings minus import spending. Strong overseas demand for Australian exports can lift the currency simply because foreign buyers generate more demand for it than Australia's import purchases offset. A positive net Trade Balance therefore strengthens the AUD, while a negative balance has the reverse effect.

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