China’s October RatingDog Services PMI edges down to 50.8

China’s Services Purchasing Managers’ Index (PMI) fell to 50.8 in October, down from September’s 51.6, according to the latest figures released by RatingDog on Wednesday.

Australian Dollar Holds Firm After Weaker China Data

Despite the weaker Chinese RatingDog Services PMI reading, the Australian Dollar, a proxy for China, continues to hold firm. At the time of writing, the AUD/USD pair is trading at 0.6975, a gain of 0.15% on the day.

Australian Dollar: Frequently Asked Questions

Interest Rates, Commodities and Sentiment Drive the Australian Dollar

The interest rate level set by the Reserve Bank of Australia (RBA) is among the most important influences on the Australian Dollar (AUD). Australia’s abundant natural resources also make the price of iron ore, its largest export, a key 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 havens is described as risk-off.

RBA Policy Shapes the Australian Dollar’s Performance

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 wider economy and, in turn, the Australian Dollar (AUD). Its principal objective is to keep inflation stable at 2-3%, raising or lowering interest rates as needed. Rates that are relatively high compared with those of other major central banks support the AUD; relatively low rates have the reverse effect. The RBA can also influence credit conditions through quantitative easing, which is negative for the AUD, or quantitative tightening, which is positive for the currency.

China’s Economic Performance Influences the Australian Dollar

As Australia’s largest trading partner, China has a substantial influence on the Australian Dollar (AUD) through the performance of its economy. A strong Chinese economy buys more Australian raw materials, goods and services, increasing demand for the AUD and lifting its value. When Chinese growth falls short of expectations, the reverse applies. This relationship means that upside or downside surprises in China’s growth figures often directly affect the Australian Dollar and the currency pairs in which it trades.

Iron Ore Prices Help Steer the Australian Dollar

With annual exports worth $118 billion according to 2021 data, iron ore is Australia’s largest export, and China is its main destination. Changes in its price can therefore influence the Australian Dollar. Rising iron ore prices generally lift the AUD by increasing overall demand for the currency, while falling prices have the opposite effect. Higher prices also tend to make an Australian trade surplus more likely, providing further support for the AUD.

Trade Surpluses Support the Australian Dollar

Another influence on the Australian Dollar is the trade balance: the difference between a country’s export earnings and its spending on imports. Strong foreign demand for Australian exports can lift the currency’s value through the excess demand generated by overseas buyers relative to Australia’s expenditure on imports. A positive net trade balance therefore supports the AUD, whereas a negative balance has the reverse effect.

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