Aussie Rebound On GDP, China Data?

The AUDUSD has come off its highs in recent days due to a strengthening of the greenback, but recent and upcoming data could suggest that the Australian dollar might stage a recovery. Markets have been reacting to the more hawkish Fed after last week’s Jackson Hole Symposium, leaving the Australian side of the trade somewhat ignored.

Trends in China are, of course, important for the AUD, as the Asian Giant is Australia’s largest trade partner. Buying and selling Australian dollars to settle exports to China are major components of currency dynamics, and the recent Chinese PMI figures provide important insight.

China Exports Remain Solid

Once again, China’s official and private PMIs diverged, with the NBS reading showing contraction and the RatingDog measure indicating expansion. The main explanation for the difference is that the official reading captures fewer large, domestically oriented, government-owned businesses, which have been struggling lately.

Exports have been the bright spot for China’s economy lately, particularly towards the tech sector. This has allowed the smaller, export-oriented firms that have a higher weighting in the RatingDog measure to outperform. However, for the impact on Australia, we have to look more closely at imports. Rising exports in dollar terms do not necessarily imply an increase in raw materials volume, which is the key for the AUD.

Growing Signs of Chinese Recovery

A closer look at the PMI components shows some positive signs, particularly relevant to Australian exports. Although the official Manufacturing PMI remained in contraction, it was higher than expected, partly due to a return to expansion in new orders. This suggests that Chinese manufacturers could step up activity to meet growing demand.

Additionally, the inventory measure has fallen. While that indicates increased activity, it also means Chinese firms will be looking to buy raw materials in the future to replenish their inventories. Assuming that demand trends continue, the Aussie could gain from more buying. Analysts note that China’s economy has been under pressure through the summer and is expected to recover going into the third quarter as increased government spending is released.

 Australia GDP Could Firm Up Hike Potential

The RBA’s minutes were particularly hawkish, which is notable given that it already has the highest rates in the G10. This makes the Aussie attractive as a carry-trade target, and it could see further upside if the market expects a high chance of another rate hike by the end of the year. Following the minutes, major Australian banks are now predicting a rate hike, possibly as soon as the September 29th meeting.

Part of this general market hawkishness rests on the RBA’s suggestion that it would “preemptively” hike rates if inflation were higher than anticipated. However, that would likely depend on whether the economy remains buoyant. A sudden downturn in the economy would likely drop the odds of a preemptive rate hike, and the Aussie with them. The consensus is for Australia’s Q2 GDP to remain steady at 0.3% growth. Exceeding that figure could firm up expectations for a hike at the next meeting and support the AUDUSD.