The latest data released on Monday revealed that China’s Caixin S&P Global Manufacturing Purchasing Managers’ Index (PMI) increased from 51.4 in April to 51.7 in May. This reading surpassed the market consensus of 51.5 for the reported month. Production expanded at the most pronounced pace since June 2022, with the fastest purchasing activity growth in three years as confidence improved. Input price inflation also rose to a seven-month high. According to Wang Zhe, an economist at Caixin Insight Group, there was an expansion in both supply and demand, with growth in manufacturers’ output reaching a 23-month high in May.
One of the significant factors affecting the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Australia, being a resource-rich country, is also influenced by the price of its biggest export, Iron Ore. Additionally, the health of the Chinese economy, Australia’s largest trading partner, plays a crucial role in determining the value of the AUD. Factors such as inflation in Australia, its growth rate, and Trade Balance also impact the Australian Dollar. Market sentiment, whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off), can also influence the AUD.
The RBA influences the Australian Dollar by setting the level of interest rates that Australian banks can lend to each other. Maintaining a stable inflation rate of 2-3% is the primary objective of the RBA, achieved by adjusting interest rates accordingly. Relatively high interest rates compared to other major central banks support the AUD, while relatively low rates have the opposite effect. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being AUD-negative and the latter AUD-positive.
As China is Australia’s largest trading partner, the health of the Chinese economy significantly impacts the value of the Australian Dollar. When the Chinese economy is performing well, it purchases more raw materials, goods, and services from Australia, increasing demand for the AUD and elevating its value. Positive or negative surprises in Chinese growth data often directly affect the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, with China being its primary destination. The price of Iron Ore can drive the Australian Dollar, with higher prices leading to an increase in the AUD value. Higher Iron Ore prices also improve the likelihood of a positive Trade Balance for Australia, which is favorable for the AUD. The Trade Balance, which reflects the difference between a country’s exports and imports earnings, can strengthen the AUD if it is positive, and weaken it if negative.
The manufacturing PMI data from China can have a significant impact on the Australian Dollar due to the strong economic relationship between the two countries. Understanding the various factors influencing the AUD, including interest rates, the Chinese economy, Iron Ore prices, and the Trade Balance, is essential for evaluating the movements of the Australian Dollar in response to market changes.