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China’s RatingDog Services PMI: What does the easing to 50.8 in October signal?
A weaker reading for China's Services Purchasing Managers' Index (PMI) emerged in RatingDog's latest data released on Wednesday, with the index easing to 50.8 in October from 51.6 in September.
How is the Australian Dollar responding?
The Australian Dollar, a proxy for China, is holding firm despite the softer Chinese RatingDog Services PMI reading. At the time of publication, the AUD/USD pair is trading at 0.6975, a gain of 0.15% for the day.
Australian Dollar: Common Questions
Interest rates set by the Reserve Bank of Australia (RBA) rank among the most important influences on the Australian Dollar (AUD). Australia's abundant resources also make the price of iron ore, its largest export, a key driver. Other considerations include the economic health of China, Australia's largest 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 havens reflects a risk-off mood.
By setting the interest rate at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) affects borrowing costs across the economy and, in turn, the Australian Dollar (AUD). Raising or lowering rates is its main tool for keeping inflation stable at 2-3%. Rates that are relatively high compared with those of other major central banks support the AUD; relatively low rates have the reverse effect. Credit conditions can also be influenced through quantitative easing or tightening, with easing weighing on the AUD and tightening supporting it.
As Australia's largest trading partner, China has a significant bearing on the value of the Australian Dollar (AUD). A strong Chinese economy buys more Australian raw materials, goods and services, increasing demand for the AUD and lifting its value. When China's growth falls short of expectations, the reverse occurs. As a result, upside or downside surprises in Chinese growth figures often directly affect the Australian Dollar and its currency pairs.
With annual exports worth $118 billion according to 2021 data, iron ore is Australia's biggest export, and China is its main destination. This makes iron ore prices a potential driver of the Australian Dollar. Rising prices generally lift the AUD by increasing overall demand for the currency, while falling prices have the opposite effect. Higher iron ore prices also tend to improve the likelihood of Australia recording a trade surplus, providing further support to the AUD.
Another influence on the Australian Dollar is the trade balance, calculated as export earnings minus spending on imports. Strong foreign demand for Australian exports can lift the currency when demand from overseas buyers exceeds Australia's spending on imported goods and services. A net trade surplus therefore strengthens the AUD, whereas a trade deficit has the reverse effect.
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