Breaking: 0.7% YoY CPI Inflation in China for October, Easing Below 0.8% Expected

China’s Consumer Price Index (CPI) rose 0.7% year on year in October. September’s increase was 0.9%, according to figures from the National Bureau of Statistics of China released on Monday. The market had forecast a 0.8% increase for October.

Further updates to follow.

Australian Dollar: Key Questions

Key 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 iron ore, its largest export, is another major driver. Other influences include economic conditions in 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, known as risk-on sentiment, supports AUD, while a preference for safe havens reflects risk-off sentiment.

Reserve Bank of Australia policy and the Australian Dollar

By setting the interest rate at which Australian banks lend to one another, the Reserve Bank of Australia (RBA) affects borrowing costs across the economy and influences the Australian Dollar (AUD). Its primary 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. The RBA can also alter credit conditions through quantitative easing or tightening. Easing weighs on AUD, while tightening supports it.

China’s economic performance and 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 AUD and lifts its value. When China’s growth falls short of expectations, the reverse occurs. 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 and the Australian Dollar

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

The trade balance and the Australian Dollar

Export earnings minus import spending make up a country’s trade balance, another influence on the Australian Dollar. Strong overseas demand for Australian exports can lift the currency by generating demand from foreign buyers in excess of that associated with Australia’s import spending. A net trade surplus therefore supports AUD, whereas a trade deficit has the reverse effect.

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