AUD/USD softens to near 0.6300 as China’s CPI contracts in February
- AUD/USD edges lower to around 0.6305 in Monday’s early Asian session.
- China’s February CPI fell into negative territory for the first time since January last year.
- US Nonfarm Payrolls rose by 151,000 in February vs. 160,000 expected.
The AUD/USD pair weakens to near 0.6305 during the early Asian session on Monday. The disappointing Chinese economic data over the weekend weighs on the China-proxy Australian Dollar (AUD). However, the concerns over a looming slowdown in the US economy might help limit the pair’s losses.
Data released by the National Bureau of Statistics on Sunday showed that China’s Consumer Price Index (CPI) fell by 0.7% YoY in February, compared to 0.5% growth in January. This figure came in softer than the estimation of a 0.5% decline. On a monthly basis, Chinese CPI inflation came in at -0.2% in February versus January’s 0.7%, softer than -0.1% expected.
Meanwhile, the country’s Producer Price Index (PPI) declined 2.2% YoY in February, following a 2.3% fall in January. The data came in below the market consensus of -2.1%. Deflationary pressures continue to weigh on the world’s second-largest economy, which exerts some selling pressure on the Aussie.
On the other hand, the cautious stance from the Reserve Bank of Australia (RBA) might support the AUD against the US Dollar (USD). The RBA is cautious about lowering the benchmark interest rate further and the decision to reduce its rate in February does not mean that the central bank is committed to cutting again at coming meetings, the minutes of the RBA meeting held on February 17 and 18 showed.
The US Nonfarm Payrolls (NFP) rose by 151,000 in February, followed by the 125,000 increase (revised from 143,000) seen in January, the US Bureau of Labor Statistics (BLS) showed Friday. This figure came in weaker than the market expectation of 160,000. The weaker-than-expected job growth in the United States could undermine the Greenback and act as a tailwind for the AUD/USD.
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.