49.3 in October: China's NBS Manufacturing PMI declines as Non-Manufacturing PMI slips to 49.7

China’s Manufacturing Purchasing Managers' Index (PMI) fell to 49.3 in October. Data released on Saturday by China’s National Bureau of Statistics (NBS) showed a decline from the previous reading of 50.1. The October figure also missed the market consensus of 50.0.

Meanwhile, the NBS Non-Manufacturing PMI fell from September’s 50.2 to 49.7 in October.

0.06% decline in AUD/USD after China PMI

Following the weaker Chinese PMI figures, the Australian Dollar (AUD), a proxy for China, trades slightly lower. At the time of writing, the AUD/USD pair trades at 0.7028, down 0.06% on the day.

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

Australian Dollar: Key Questions

Main Drivers of the Australian Dollar

Interest rates set by the Reserve Bank of Australia (RBA) are among the strongest influences on the Australian Dollar (AUD). For resource-rich Australia, the price of its largest export, iron ore, is another major driver. Other influences include the economic health of China, Australia’s biggest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor appetite for risk also matters. A shift towards riskier assets (risk-on) supports the AUD, while a preference for safe havens (risk-off) also shapes its performance.

Reserve Bank of Australia Policy and the Australian Dollar

By setting the interest rate 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 as needed. 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, whereas tightening is positive.

China’s Economic Health and the Australian Dollar

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. This raises demand for the AUD and lifts its value. Growth in China that falls short of expectations produces the opposite effect. Chinese growth figures that surprise on either the upside or downside therefore often directly affect the Australian Dollar and its currency pairs.

Iron Ore Prices and the Australian Dollar

With annual exports worth $118 billion according to 2021 data, iron ore is Australia’s largest export, and China is its main destination. Changes in iron ore prices can therefore influence the Australian Dollar. Rising prices generally lift overall demand for the currency, supporting the AUD, while falling prices tend to have the reverse effect. Higher iron ore prices also make an Australian trade surplus more likely, providing further support for the AUD.

The Trade Balance and the Australian Dollar

Another influence on the Australian Dollar is the trade balance: export earnings less import expenditure. Strong overseas demand for Australian exports can lift the currency when demand from foreign buyers exceeds Australia’s spending on imports. A positive net trade balance therefore supports the AUD, while a negative balance has the reverse effect.