52.0: China’s RatingDog Manufacturing PMI beats market expectations despite September slowdown

At 52.0 in September, China's RatingDog Manufacturing Purchasing Managers' Index (PMI) edged down from August's 52.1, according to the latest figures released by RatingDog on Monday. The market forecast had been for a reading of 51.6.

Australian Dollar shows little reaction to China’s RatingDog Manufacturing PMI

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

Australian Dollar Questions Answered

Interest rates, commodities and sentiment drive the Australian Dollar

Interest rates set by the Reserve Bank of Australia (RBA) are among the main influences on the Australian Dollar (AUD). Australia’s abundant natural resources also make the price of iron ore, its largest export, an important driver. Other influences include the strength of China’s economy, as Australia’s largest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor appetite for risk matters too: a shift towards riskier assets (risk-on) supports the AUD, while a preference for safe havens is described as risk-off.

Reserve Bank of Australia policy shapes 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 rates across the economy and, in turn, the Australian Dollar (AUD). The RBA’s primary objective is to keep inflation stable at 2-3%, raising or lowering interest rates to achieve this. Rates that are relatively high compared with those of other major central banks underpin the AUD; relatively low rates have the reverse effect. Credit conditions can also be influenced through quantitative easing or tightening. Easing weighs on the AUD, whereas tightening supports it.

China’s economic performance influences the Australian Dollar

As Australia’s biggest trading partner, China has a substantial influence on the Australian Dollar (AUD). A healthy 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. This trading relationship means that upside or downside surprises in China’s growth figures often directly affect the Australian Dollar and its currency pairs.

Iron ore prices help steer the Australian Dollar

Australia’s largest export is iron ore, worth $118 billion a year according to 2021 data, with China the main destination. This makes its price an important potential influence on the Australian Dollar. Rising iron ore prices generally lift overall demand for the currency, supporting the AUD, while falling prices have the reverse effect. Higher prices also tend to increase the likelihood of an Australian trade surplus, providing further support for the AUD.

The trade balance affects the Australian Dollar’s value

Another influence on the Australian Dollar is the trade balance: export earnings less the cost of imports. Strong overseas demand for Australian exports can lift the currency’s value when the demand generated by foreign buyers exceeds Australia’s spending on imports. A net trade surplus therefore strengthens the AUD, whereas a trade deficit has the reverse effect.

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