50.8 in October: China’s RatingDog Services PMI Edges Lower

50.8 was the October reading for China's Services Purchasing Managers' Index (PMI). The index fell from 51.6 in September, according to the latest figures released by RatingDog on Wednesday.

Australian Dollar holds firm

Despite the softer RatingDog Services PMI reading from China, the Australian Dollar, a proxy for the Chinese economy, holds firm. As of writing, the AUD/USD pair trades at 0.6975, a gain of 0.15% on the day.

Australian Dollar: Key Questions Answered

Key Drivers of the Australian Dollar

Interest rates set by the Reserve Bank of Australia (RBA) rank among the main drivers of the Australian Dollar (AUD). For resource-rich Australia, the price of iron ore, its largest export, is another major influence. Other factors include economic conditions in China, Australia's biggest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor sentiment also matters: demand for riskier assets (risk-on) supports the AUD, while a preference for safe havens reflects risk-off conditions.

Reserve Bank of Australia Policy and the Australian Dollar

By setting the interest rate at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) affects borrowing rates across the economy and, in turn, the Australian Dollar (AUD). Keeping inflation stable at 2-3% is the RBA's primary objective, pursued through increases or reductions in interest rates. 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. Easing is negative for the AUD, while tightening is positive.

China's Economic Performance and the Australian Dollar

As Australia's largest trading partner, China has a substantial influence on the Australian Dollar (AUD) through its economic performance. A strong Chinese economy buys more Australian raw materials, goods and services, increasing demand for the AUD and lifting its value. Growth in China that falls short of expectations has the reverse effect. Consequently, upside and downside surprises in Chinese growth figures often feed directly into the Australian Dollar and its currency pairs.

Iron Ore Prices and the Australian Dollar

At $118 billion annually, according to 2021 data, iron ore is Australia's largest export, with China its main destination. Its price can therefore influence the Australian Dollar. Rising iron ore prices generally lift overall demand for the AUD and strengthen the currency; falling prices generally have the reverse effect. Higher prices also tend to increase the likelihood of an Australian trade surplus, providing further support for the AUD.

The Trade Balance and the Australian Dollar

Another influence on the Australian Dollar is the trade balance: export earnings minus import spending. Strong overseas demand for Australian exports can lift the currency through the excess demand generated by foreign buyers relative to Australia's spending on imports. A net trade surplus therefore strengthens the AUD, whereas a trade deficit has the reverse effect.

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