Two key data points crucial for commodity currencies drop on Wednesday as China clears the table ahead of its extended Golden Week holiday. After the RBA’s “dovish hike”, the upcoming China PMIs data is likely to set the tone for commodity currencies like the AUD during the lower liquidity period. Traders should be on the lookout for potential higher volatility around the data releases.
As expected, earlier today the RBA raisted its reference rate by 25bps to 4.60%, the fourth hike this year. Markets anticipate that Australia’s central bank will keep rates unchanged for the rest of the year, but still on an upward track. Traders have penciled in a rate hike in the first quarter of next year. However, the currency had a negative reaction following the rate decision after Governor Michelle Bullock seemed to emphasize the war in the Middle East in talking about inflationary pressure.
Why Markets See RBA More Dovish
Australia’s central bank provided some mixed messages in the wake of its rate decision, allowing the market to pick what it wants to hear. Bullock started her post rate decision press conference with hard rhetoric about inflation, saying that inflation would persist for longer than expected. This seemed to confirm the hawkish outlook.
She pointed to the AI boom and the Middle East as the main catalysts for the upgrade in the inflation projections. However, she also noted that the RBA discussed holding rates unchanged, which seemed at odds with the market’s view. Economists generally view higher fuel prices as producing one-off inflationary pressure, which implies central banks might hike rates but not pursue a prolonged period of hikes. If the situation in the Middle East is a main catalyst for higher interest rates, then there is a risk of rates needing to be cut if the conflict is resolved.
The Dollar and China Factor
Following the rate decision, markets now see the RBA with the shallowest rate hike trajectory among major central banks. Futures see the Fed hiking rates faster, narrowing the gap between Australia and the US, which would likely keep the AUDUSD under pressure.
Where the Aussie could get a boost is if there is a notable recovery in China. After Chinese President Xi Jinping visited his US counterpart Donald Trump last week, the market generally interpreted the summit as a “photo op”. There was no substantial change in the relationship between the world’s two largest economies, and the extension of the “trade truce” mostly kicked the can down the road.
The outlook for China PMIs could therefore become an important test for whether improving industrial activity can provide the Aussie with some support.
What the Market is Looking For
Markets are not expecting any major boost to the Chinese economy, but have become more cautiously optimistic. As China is Australia’s largest exporter, and the Asian giant is influential for most commodity currencies, a return to industrial expansion could support the AUD and NZD. On the other hand, if the upcoming data disappoints, commodity currencies could suffer, particularly as the market is seeing a more aggressive Fed.
The consensus if for September China NBS manufacturing PMI to rise to 50.0 from 49.8 prior. A relatively minor improvement, but it would cross the threshold into technical expansion. Meanwhile the private RatingGod manufacturing PMI is projected to stay unchanged at 51.5, implying continued solid export demand.
Taken together, the China PMIs could provide an important signal for commodity currencies during the lower liquidity period, particularly if the data points to a renewed expansion in China’s industrial sector.
