Australian Dollar, AUD/USD, China Economy, PMI – TALKING POINTS
- The Australian Dollar was unfazed after Chinese economic data crossed the wires
- China’s manufacturing PMI contracted in August, dimming economic rebound hopes
- AUD-sensitive Iron ore prices in China are trading lower as the US Dollar remains strong
The Australian Dollar appears largely unfazed by Chinese factory activity data released Wednesday morning showing that the country’s factory activity contracted for a second month in August. The National Bureau of Statistics reporteda contraction for the August purchasing managers’ index (PMI), which crossed the wires at 49.4, beating the 49.2 Bloomberg consensus forecast.China’s equity markets are mostly lower after a downbeat US session.
China’s manufacturing sector last expanded in June, but just barely at 50.2–a historically weak expansion for the world’s largest exporter. The protracted depression in manufacturing activity may not improve anytime soon, with central banks around the globe tightening policy. That is likely to throttle consumer demand further, which would belly China’s factories with orders.
The offshore Yuan has weakened significantly, something that typically boosts exports. That presents its own issues regarding capital flows, but the more pressing economic issue is domestic. Sporadic but ongoing Covid flare-ups have forced local governments to enact virus measures to curb the spread. Those measures typically impact factory activity, as well as domestic demand, along with complicating supply chains. The country is also facing energy-related issues due to extreme weather.
The central government and the People’s Bank of China (PBOC) have recently ramped up supportive measures and planning to help increase credit growth and counteract the effects of the country’s property crisis, but that may be too late and too little. Policymakers can encourage lending, but banks are already hurting from the economic fallout around property lending.
Moreover, cutting benchmark lending rates will only squeeze profit margins further leading to the need for more government support. Despite today’s PMI beating estimates, traders are unlikely to turn bullish on China’s economy in the near term. In line with that assessment, iron ore prices in China are trading lower, which also weighs on the Australian Dollar.
AUD/USD 5-Minute Chart
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— Written by Thomas Westwater, Analyst for DailyFX.com
To contact Thomas, use the comments section below or @FxWestwater on Twitter