52.0: China’s RatingDog Manufacturing PMI tops forecasts despite September decline

52.0 was the September reading for China's RatingDog Manufacturing Purchasing Managers' Index (PMI). The figure eased from 52.1 in August, according to the latest data released by RatingDog on Monday. The market forecast stood at 51.6.

China’s RatingDog Manufacturing PMI: Market Response

China’s PMI release has had little, if any, effect on the Australian Dollar (AUD), a proxy for China. At the time of writing, the AUD/USD pair trades at 0.7030, down 0.03% on the day.

Australian Dollar: Key Questions

Australian Dollar: Main Drivers

Interest rates set by the Reserve Bank of Australia (RBA) are among the strongest influences on the Australian Dollar (AUD). Australia’s resource-rich economy also makes the price of iron ore, its largest export, a key driver. Other influences include economic conditions in China, Australia’s biggest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor sentiment matters too: a shift towards riskier assets, known as risk-on, supports the AUD, while a preference for safe havens reflects a risk-off mood.

Reserve Bank of Australia: Policy Effects on the Australian Dollar

By setting the interest rate at which Australian banks 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. Keeping inflation stable at 2-3% is the RBA’s primary objective, pursued through increases or reductions in interest rates. Rates that are relatively high compared with those of other major central banks support the AUD; relatively low rates have the reverse effect. Quantitative easing and tightening provide further tools for influencing credit conditions. Easing is negative for the AUD, while tightening is positive.

China’s Economy: Implications for the Australian Dollar

As Australia’s largest trading partner, China has a substantial influence on the Australian Dollar (AUD) through its economic performance. A strong Chinese economy buys more Australian raw materials, goods and services. This raises demand for the AUD and lifts its value. When China’s growth falls short of expectations, the reverse applies. Chinese growth figures that surprise on either the upside or downside therefore often affect the Australian Dollar and its currency pairs directly.

Iron Ore Prices: Influence on the Australian Dollar

Australia’s largest export is iron ore, worth $118 billion annually according to 2021 data, with China the main destination. Changes in its price can therefore influence the Australian Dollar. Rising iron ore prices generally lift the AUD by increasing overall demand for the currency. Falling prices generally have the reverse effect. Higher iron ore prices also tend to make a positive Australian trade balance more likely, providing further support for the AUD.

Trade Balance: Effects on the Australian Dollar

Another influence on the Australian Dollar is the trade balance: export earnings minus spending on imports. Strong overseas demand for Australian exports can lift the currency’s value through the excess demand generated by foreign buyers relative to Australia’s import spending. A positive net trade balance therefore strengthens the AUD, while a negative balance has the reverse effect.

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