Traders were optimistic for the Aussie going into the weekend, as the AUDUSD recovered to levels not seen since mid-December. However, disappointing Chinese data and upcoming Australian Data have shifted the focus. This week, there are several key data points that might help change the situation.
The Aussie is somewhat unique among major currencies at the moment as the RBA is keeping rates high to deal with persistent inflation. While many countries are still dealing with inflation, most central banks expect it to normalize soon and are easing up a bit in order to avoid a recession. But Australia’s economy remains resilient enough, at least according to the way the RBA is acting, to keep rates high, in part thanks to exports to China.
What Changed Things
Markets got hit with a bucket of cold water early on Monday with the release of the official Chinese NBS PMI figures. Both the manufacturing as well as non-manufacturing (services) PMIs were well below expectations. Analysts had expected the manufacturing one in particular to advance into expansion thanks in part to the government’s stimulus efforts. Instead, it slipped pretty solidly into contraction at 49.1 from 50.1 prior, and well below the 50.3 expected.
Other developments out of China, such as the release of a new AI model that threatens the way more advanced artificial intelligence is developed in the US put an additional damper on the market. With risk appetite fleeing, the Aussie was particularly vulnerable. However, the main thrust was the market reaction to the PMI, as it indicated a slowing down of the world’s second largest economy despite massive stimulus and promise for more action from Beijing.
A Chance for a Rebound in Light of Australian Data?
China is going on holiday for several days for the Lunar New Year, which will mean reaction to the Chinese data will be muted until we get the next update at the end of the week with the Caixin survey. That could be seen as confirming or dismissing the fears around the official data. What investors could latch on to is the hope that this disappointing data will be an impetus for more stimulus. That could generate a rebound in the markets if there is a return of risk appetite.
In the meantime, attention for the Aussie focuses internally with the release of two key data points this week. First is the NAB Business Confidence figure coming out on Tuesday. The expectation is that Australian businesses will have resumed their confidence in January after a bit of a depressing December. That could put to rest concerns of the economy slowing down enough to push the RBA to ease sooner.
Getting the Central Bank to Budge
The next bit is the quarterly inflation data that will be published on Wednesday. Australian Data on headline inflation is expected to ease to 2.2% from 2.8%, putting it below the midpoint of the 2.0-3.0% target that the RBA holds.
However, that rate includes a lot of moving variables, and the market is likely to care more about the RBA’s preferred measure: Trimmed Mean. That is expected to stay quite high, though moderate a bit at 3.4% from 3.5% prior. If it stays elevated, it could give the markets reason to expect that the RBA won’t be getting around to easing anytime soon, keeping the Aussie elevated. But a surprise to the downside in this figure, coupled with what happened in China, could put a drag on the Aussie for a while.