THE TAKEAWAY: Manufacturing activity in China gains pace > Expectations for RBA rate cuts may fade > Aussie quickly pared gains on technical pressure
The Australian dollar rallied versus its major counterparts as manufacturing activity in China gained pace in December. The HSBC Manufacturing PMI index came across the wires at 51.5 in December, up from 50.5 in November where a reading above 50 indicates growing activity.
The Reserve Bank of Australia policy makers may be less tempted to reduce interest rates as the Australian economy benefits from exporting raw material to Chinese manufacturers. So, an uptick in manufacturing activity in China may lead to increased orders for Australian goods, which would help to stimulate Aussie growth and reduce the policy makers’ need to cut rates. Currently markets are pricing in a 63 percent probability that the RBA will reduce interest rates by 25 basis points during the next meeting on February 5 according to Credit Suisse data.
Forex traders bought the high yielding currency immediately after the data release, however gains were erased just as quickly as the Aussie has broken a rising trendline after finding resistance within a larger consolidation pattern as shown on the daily chart below.
AUD/USD, 1 Minute Chart
AUD/USD, Daily Chart