China's Caixin Manufacturing PMI contracts to 49.8 in July vs. 51.5 expected
China's Caixin Manufacturing Purchasing Managers' Index (PMI) unexpectedly contracted to 49.8 in July, compared to a 51.8 print registered in June, the latest data showed on Wednesday.
The market consensus was 51.5 in the reported month.
Key highlights (via Caixin)
Output expands at the slowest pace in nine months.
Average selling prices decline as input cost inflation eases.
Business confidence improves in July.
“Supply continued to outpace demand. Manufacturers’ output grew for the ninth straight month in July, although the growth was marginal, indicating the production expansion was limited,” said Wang Zhe, an economist at Caixin Insight Group.
Wang added, “performance on the demand side was weaker, with total new orders declining for the first time since July last year.”
Data released by China’s National Bureau of Statistics (NBS) showed Wednesday that the official Manufacturing Purchasing Managers' Index (PMI) declined to 49.4 in July, beating estimates of 49.3. The Non-Manufacturing PMI dipped to 50.2 in the same period vs. June’s 50.5 and the expected 50.2 figure.
AUD/USD reaction to China’s PMI data
The downbeat Chinese Manufacturing PMI exerts renewed selling pressure on the Aussie Dollar, as AUD/USD flirts with intraday lows near 0.6635 at the time of writing, modestly flat on the day.
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.
Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
