China's October NBS Manufacturing PMI drops to 49.3 as Non-Manufacturing PMI slips to 49.7

Manufacturing activity in China disappointed market expectations in October, with the Manufacturing Purchasing Managers' Index (PMI) slipping to 49.3 from the previous reading of 50.1. Figures released on Saturday by China’s National Bureau of Statistics (NBS) fell short of the market consensus of 50.0 for the month.

Meanwhile, October’s reading for the NBS Non-Manufacturing PMI fell to 49.7 from 50.2 in September.

How did the Australian Dollar react?

Following the disappointing Chinese PMI figures, the Australian Dollar (AUD), a proxy for China, has eased marginally. At the time of writing, the AUD/USD pair trades at 0.7028, down 0.06% on the day.

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Australian Dollar: Key Questions Answered

Which factors shape the Australian Dollar’s value?

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 iron ore, its largest export, an important driver. Other influences include the economic health of 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 (risk-on) supports the AUD, while a preference for safe-haven assets reflects risk-off sentiment.

How does Reserve Bank of Australia policy affect the Australian Dollar?

By determining the interest rate at which Australian banks lend to one another, the Reserve Bank of Australia (RBA) affects borrowing costs across the economy and, in turn, the Australian Dollar (AUD). Its primary objective is to keep inflation stable at 2-3%, raising or lowering interest rates to achieve this. When rates are relatively high compared with those of other major central banks, they support the AUD; relatively low rates have the reverse effect. Credit conditions can also be influenced through quantitative easing or tightening. While easing is negative for the AUD, tightening is positive.

Why does China’s economic performance matter for the Australian Dollar?

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

Why do iron ore prices influence the Australian Dollar?

With China its main destination, iron ore is Australia’s biggest export, worth $118 billion annually according to 2021 data. Its price can therefore influence the Australian Dollar. Rising iron ore prices generally lift overall demand for the currency, pushing the AUD higher, while falling prices have the reverse effect. Higher prices also tend to increase the likelihood of Australia recording a trade surplus, providing another source of support for the AUD.

Why is the trade balance important for the Australian Dollar?

Another influence on the Australian Dollar is the trade balance: the difference between a country’s export earnings and its import payments. Strong overseas demand for Australian exports can lift the currency when the resulting demand from foreign buyers exceeds Australia’s spending on imports. A net trade surplus therefore strengthens the AUD, whereas a trade deficit has the opposite effect.