AUD/USD unfazed on China PMI data amid souring market sentiment

The Australian dollar appears largely unfazed by Chinese factory activity data released Wednesday morning showing that it contracted for a second month in August. The National Bureau of Statistic’s purchasing managers’ index (PMI) print crossed the wires at 49.4, beating the 49.2 Bloomberg consensus forecast.

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 output 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 this year, something that typically boosts exports. On the other hand, the softer currency presents its own issues regarding capital flows. Still, the more pressing economic issue is domestic. Sporadic Covid flare-ups have forced local governments to enact virus measures to curb the spread. These typically impact factory activity, domestic demand and complicate 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. They are also 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 readings beating estimates, traders are unlikely to turn bullish on China’s economy in the near term. In line with that assessment, Chinese iron ore prices are trading lower, which will likely weigh on the Australian dollar.

AUD/USD five minute chart

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