How is the Australian Dollar holding steady amid RBNZ rate hike bets and weak PMI data?

AUD remains resilient even as October PMI figures show private-sector activity contracting for the first time since May.
RBNZ rate hike expectations rose sharply to 45% after Andrew Hauser warned of a deteriorating inflation outlook.
AUD/USD faces a potential limit to its upside as recovering US Treasury yields lend support to the US Dollar.

Resilience in the Australian Dollar (AUD) is keeping AUD/USD steady following the preliminary S&P Global Purchasing Managers' Index (PMI) release. After a modest decline the previous day, the pair is trading near 0.7020 in Friday’s early European session. The S&P Global Composite PMI fell from 51.3 in September to 47.7 in October, its weakest reading since March. The data also signalled the first contraction in private-sector activity since May.

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A second consecutive month of contraction was recorded in manufacturing, although the Manufacturing PMI edged higher to 49.7 in October from September’s 21-month low of 49.6. The Services PMI, meanwhile, dropped from 51.9 in September to 47.8 in October. This was its lowest reading since March and its first contraction since May. New business continued to expand, however, despite a marked slowdown in growth.

Expectations of a Reserve Bank of Australia (RBA) rate hike have strengthened among traders after comments by RBA monetary policy board member Andrew Hauser. In remarks on Wednesday, Hauser described the inflation outlook for the coming months as "materially worse". The Guardian reported that the probability of a hike at the November policy meeting rose to 45%, compared with 30% before his comments. Such a move would be the fifth rate increase this year, taking the Official Cash Rate (OCR) target to 4.85% from 4.6%, its highest since the global financial crisis.

A recovering US Dollar (USD) could nevertheless limit further gains in AUD/USD. After falling more than 10 basis points to a one-month low the previous day, the US 10-year Treasury yield bounced back to nearly 4.98% on Friday. Earlier, safe-haven flows had put upward pressure on US bonds as the sell-off in technology and artificial intelligence stocks intensified. Financial markets have also pared back expectations of additional Federal Reserve rate hikes amid mounting doubts over the sustainability of AI investment, a key driver of US economic growth.

Australian Dollar: Common Questions

Which factors matter most for the Australian Dollar?

Interest rates set by the Reserve Bank of Australia (RBA) are among the strongest influences on the Australian Dollar (AUD). Australia’s abundant natural resources also make the price of its largest export, iron ore, an important driver. Other considerations include economic conditions in China, Australia’s biggest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor sentiment matters too: a willingness to buy riskier assets, known as risk-on, supports AUD, while a preference for safe havens is described as risk-off.

Why do Reserve Bank of Australia decisions affect the Australian Dollar?

By determining the interest rate at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) influences borrowing costs across the economy and, in turn, the Australian Dollar (AUD). Its principal objective is to keep inflation stable at 2-3%, raising or lowering rates as needed. When its rates are relatively high compared with those of other major central banks, AUD receives support; relatively low rates have the reverse effect. The RBA can additionally alter credit conditions through quantitative easing or tightening. Easing weighs on AUD, whereas tightening supports it.

Why does the Australian Dollar respond to the Chinese Economy?

As Australia’s biggest trading partner, China has a substantial influence on the Australian Dollar (AUD) through the strength of its economy. A healthy Chinese economy buys more Australian raw materials, goods and services, increasing demand for AUD and raising its value. When Chinese growth falls short of expectations, the reverse applies. This is why upside or downside surprises in China’s growth figures often directly affect the Australian Dollar and its currency pairs.

Why are Iron Ore prices important for the Australian Dollar?

With annual exports worth $118 billion according to 2021 data, iron ore is Australia’s biggest export, and China is its main destination. Changes in its price can therefore influence the Australian Dollar. Rising iron ore prices generally boost overall demand for AUD, pushing the currency higher, while falling prices have the opposite effect. Higher prices also increase the likelihood of an Australian trade surplus, providing another source of support for AUD.

Why does the Trade Balance matter for the Australian Dollar?

Another influence on the Australian Dollar is the trade balance, calculated as export earnings minus spending on imports. Strong overseas demand for Australian exports can raise the currency’s value when demand from foreign buyers exceeds Australia’s spending on imported goods. A net trade surplus therefore strengthens AUD, while a trade deficit has the opposite effect.