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Australian Dollar Hit By Weak China PMIs, RBA, G20 Eyed

Australian Dollar Hit By Weak China PMIs, RBA, G20 Eyed

David Cottle, Analyst

Australian Dollar, China PMI, Talking Points:

  • The Australian Dollar was hit by disappointing Chinese PMI
  • Manufacturing there is in a parlous state, but the service sector underperformed too
  • The market is now looking with even more hope to Mr. Trump and Mr. Xi

Fourth-quarter technical and fundamental forecasts from the DailyFX analysts are here.

The Australian Dollar took a knock Friday from some disappointing Chinese economic data, some of which suggested that the manufacturing sector there was close to contraction.

Its official November Purchasing Managers Index came in at 50, just below the expected 50.2 print which had also been October’s score. In the logic of PMIs any reading above 50 signifies expansion so this latest release was, uncomfortably, right on the line. It was also the weakest PMI since early 2016, suggesting strongly that a slowing overall economy and, probably, US tariffs, are really starting to bite. The service sector PMI was 53.4, clearly much stronger but still below both the expected 52.8 and the previous month’s 52.9. The composite came in at 52.8.

AUD/USD fell a little after the data. The Australian Dollar can act as the foreign exchange markets’ favorite liquid China proxy thanks to its home country’s huge export links with the world’s second largest economy.

Australian Dolalr Vs US Dollar, 5-Minute Chart

However, market focus is now squarely on this weekend’s Group of 20 summit in Argentina, at which US President Donald Trump will meet his Chinese counterpart Xi Jinping. Hopes are high for somewhat of a thaw in frozen trade relations between the two countries and these latest data perhaps highlight how pressing a deal could be for global growth, and Chinese growth in particular.

On its broader, daily chart AUD/USD has been boosted in recent weeks up to highs not seen in August as investors have clung to those trade hopes and, to some extent, relaxed expectations of US interest rate rises next year.

Downtrend Broken. Australian Dollar Vs US Dollar, Daily Chart

That said the Reserve Bank of Australia will meet to set monetary policy next week, on Tuesday. With no increase to Australia’s record-low Official Cash Rate priced into futures markets well into 2020, it seems unlikely that the Australian Dollar can hope for sustained support against the greenback on interest-rate differential grounds. The RBA may also have something to say about AUD/USD's resurgence, given its oft-repeated view that currency strength makes its inflation target harder to hit.

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--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.