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Australian Dollar Stronger on Chinese Manufacturing, US Debt Agreement

By David Liu
01 August 2011 01:31 GMT

THE TAKEAWAY: Chinese manufacturing weakens less than expected > Higher sentiment with US debt deal > AUD, NZD strengthens

The Australian and New Zealand dollars traded higher after Chinese Manufacturing PMI beat analyst estimates, suggesting that the key component of the Chinese economy was still growing moderately. The Oceanic dollars were also helped by higher confidence on President Obama’s statement that an agreement on the debt has been reached between both parties.

Chinese official PMI Manufacturing data for July was recorded at 50.7, versus an expected 50.2 and a previous 50.9. Although the reading was weaker than the previous data, indicating that the key Chinese manufacturing sector was slowing, investors were relieved that the component was still growing at a slower pace. A PMI reading of below 50 would mean shrinkage in the industry.

Australian_Dollar_Stronger_on_Chinese_Manufacturing_body_Picture_5.png, Australian Dollar Stronger on Chinese Manufacturing, US Debt Agreement

Chinese Manufacturing PMI. Chart generated with Bloomberg LP Professional Terminal.

The Chinese National Bureau of Statistics report showed an improvement in new orders to 51.1 from 50.8 previously, and a pickup in purchases quantity to 52.0 from 51.5. Inventories of raw materials fell to 47.6 in July from 48.5 in June, while inventories of finished goods declined to 49.2 from 51.0. This data suggests a possible strengthening of the domestic market, with still-strong demand on raw materials, including from Australia and New Zealand. However, the overall weakening may be still due to aggressive tightening by the People’s Bank of China, as well as slower imports of Chinese goods as recovery in key US, European and Japanese markets remain fragile.

Risk sentiment in the markets were also helped by President Obama’s statement that Congressional leaders from both parties have reached an agreement on the debt and deficit before the Treasury exhausts its borrowing capacity around August 2nd. Although specific details on the plan are currently unclear, the prospects that a possible default may be averted fed risk-on buying. The yen weakened 1.450% against the dollar and the Swiss franc weakened just over 1%. Higher yield currencies such as the Australian and New Zealand dollars both gained more than 0.5% against the dollar after the reports.

Australian_Dollar_Stronger_on_Chinese_Manufacturing_body_Picture_6.png, Australian Dollar Stronger on Chinese Manufacturing, US Debt Agreement

AUDUSD 5 minute chart; vertical line indicates time of Chinese PMI release. Chart generated with FXCM Strategy Trader.

Australian_Dollar_Stronger_on_Chinese_Manufacturing_body_Picture_7.png, Australian Dollar Stronger on Chinese Manufacturing, US Debt Agreement

NZDUSD 5 minute chart; vertical line indicates time of Chinese PMI release. Chart generated with FXCM Strategy Trader.

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01 August 2011 01:31 GMT