Australian Dollar declines on soft Chinese data
- China's soft CPI and PPI data signals deflation risk, weighs on AUD.
- Deflationary risks in China may limit fiscal measures to boost consumption.
- USD recovery also contributed to the downturn.
The AUD/USD declined by 0.25% to 0.6655 on Monday, weighed down by recession fears and weak data from China. China's soft inflation figures data signaled deflation risks. The US dollar strengthened, which also weighted on the pair.
The Australian economy faces an uncertain future. The Reserve Bank of Australia's (RBA) aggressive stance against inflation suggests that any potential easing in monetary policy is unlikely in the near term. Market expectations have shifted, with only a slight reduction of interest rates by 0.25% being anticipated in 2024.
Daily digest market movers: Australian Dollar declines amidst recession fears in China
- China's soft Consumer Price Index (CPI) and Producer Prince Index (PPI) indicated deflationary risks.
- CPI came in at 0.6% YoY vs 0.5% expected, while PPI declined by 1.8% YoY vs the 1.5% expected.
- Food prices drove CPI inflation higher, but core inflation remains subdued at 0.3% YoY.
- Deflationary risks persist, highlighting the need for fiscal measures to boost consumption.
- On the US side, the Greenback recovered further after mixed labor market figures reported on Friday.
- The focus is now on Wednesday’s CPI figures from August.
- Monetary policy divergences between the Federal Reserve and the Reserve Bank of Australia may support the AUD/USD downside.
AUD/USD technical outlook: Pair faces bearish momentum with support at 0.6600
The Relative Strength Index (RSI), which is a technical indicator measuring the strength and momentum of a trend, is currently at 45 in the negative area, indicating that the bears are in control. The Moving Average Convergence Divergence (MACD), which is another technical indicator used to identify trends, is also showing bearish momentum.
The pair is likely to remain under pressure in the near term. The 0.6645 (100-day SMA) level is a key support level, which if broken could send the pair to the 0.6600 level. On the upside, the 0.6700 level is a key resistance level, which if broken could send the pair to the 0.6720 level (200-day SMA).
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.