Market update: Australian dollar spikes after China PMI beat

AUD gains against USD

The Australian dollar rose briefly against the US dollar on tentative signs that China's manufacturing activity could be reviving. China NBS manufacturing PMI rose slightly to 49.7 in August vs. 49.4 expected, and 49.3 in July. NBS non-manufacturing PMI slowed to 51.0 vs. 51.1 expected and 51.5 in July. While the manufacturing sector is still in contraction territory, the improvement provides comfort that the recent stimulus measures are spilling over the economy. 

Thursday’s data is in line with the recent less-worse-than-expected China macro data, but still  broadly underwhelming, as the Economic Surprise Index shows. The China Economic Surprise Index has rebounded slightly recently, but it is not too far from mid-2020 lows (Covid levels) which has prompted analysts to downgrade growth estimates for the current year.

China is Australia’s largest export destination and changes in the world’s second-largest economy tend to have implications for the Australian economy.

China adopts targeted stimulus approach

Chinese policymakers have responded with a spate of targeted stimulus measures in recent months in an attempt to revive the faltering post-Covid recovery and a struggling property sector. However, with a massive stimulus seemingly off the table (given the associated risks of creating imbalances within the economy), broader risk sentiment is likely to drive AUD in the interim. 

AUD/USD 5-minute chart

Rate hikes unecessary now

Risk appetite has been contained for now as recent soft data doesn’t suggest a resurgence in US economic growth, capping US yields and weighing on the US dollar globally. The stabilisation in risk sentiment has overshadowed the moderation in Australian inflation, lessening the need for further rate hikes by the Reserve Bank of Australia.

AUD/USD weekly chart

AUD/USD technical analysis

On technical charts, AUD/USD is attempting to break above a vital ceiling at last week’s high of around 0.6500. A decisive break above could pave the way toward the 200-period moving average on the 240-minute charts (now at about 0.6600). 

Bearish pressure on AUD/USD has eased recently – a possibility highlighted in the previous update.

AUD/USD 240-minute chart

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