China’s Caixin Manufacturing Purchasing Managers’ Index (PMI) unexpectedly fell to 50.5 in December after recording 51.5 in November, the latest data showed on Thursday.

The market forecast was for a 51.7 reading in the reported month.

Key highlights (via Caixin)

New orders and output growth both slow from November.

Employment down marginally.

Average selling prices decline despite rising input prices.

“Supply and demand expanded. Manufacturers’ output and demand continued to grow as the market improved. The gauge for output stayed in expansionary territory for the 14th consecutive month, while total new orders rose for the third straight month,” said Wang Zhe, an economist at Caixin Insight Group.

Wang added, “however, both grew at a slower clip as the production and sales of investment goods fell. Exports dragged on demand amid mounting uncertainties stemming from the overseas economic environment and global trade.”

Data released by China’s National Bureau of Statistics (NBS) showed Tuesday that the official Manufacturing Purchasing Managers’ Index (PMI) eased to 50.1 in December, missing estimates of 50.3. The Non-Manufacturing PMI rose to 52.2 in the same period vs. November’s 50.0 and the expected 50.2 print.

AUD/USD reaction to China’s PMI data

The downbeat Chinese Manufacturing PMI weighs negatively on the Aussie Dollar, as AUD/USD pauses its upswing near 0.6220 at the time of writing, up 0.34% on the day.

Australian Dollar FAQs

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

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