The latest data published by RatingDog on Monday showed that China’s services PMI fell to 52.0 in December from 52.1 in November.
AUD/USD reaction to China’s services PMI
The Chinese proxy, the Australian Dollar (AUD), remains weak after the Chinese data, with AUD/USD losing 0.15% on the day to 0.6685, as of writing.
Frequently asked questions about the Australian dollar
One of the most important 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 major driver is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is one factor, in addition to Australia’s inflation, its growth rate and its trade balance. Market sentiment – whether investors are snapping up riskier assets (risk on) or looking for safe havens (risk off) – is also a factor, with risk appetite positive for the Australian dollar.
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 affects the level of interest rates in the economy as a whole. The RBA’s main objective 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 Australian dollar, and relatively low interest rates. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being AUD negative and the latter AUD positive.
China is Australia’s largest trading partner, so the health of the Chinese economy has a major impact on the value of the Australian Dollar (AUD). When the Chinese economy is performing well, it buys more raw materials, goods and services from Australia, which raises demand for the Australian dollar, raising its value. The opposite is the case when the Chinese economy does not grow as quickly as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian dollar and its crosses.
Iron ore is Australia’s largest export, representing $118 billion annually according to 2021 data, and China is its main destination. Therefore, the price of iron ore could be a driver of the Australian dollar. In general, if the price of iron ore rises, the Australian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of iron ore falls. Higher iron ore prices also tend to increase the likelihood of a positive trade balance for Australia, which is also positive for the Australian dollar.
The balance of trade, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can affect the value of the Australian dollar. If Australia produces highly sought-after exports, its currency will gain value from the excess demand generated by foreign buyers seeking to buy its exports in exchange for what it spends to buy imports. Therefore, a positive net trade balance strengthens the Australian dollar, with the opposite effect if the trade balance is negative.
