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Australian dollar unmoved by China CPI and business confidence data

The Australian dollar shrugged off weak Chinese CPI data and mixed business confidence survey as the prospects of a Fed rate rise in December appeared to weigh more heavily on the currency.

Inflation in China fell by a bigger margin than expected in October, dropping to 1.3% from 1.6%, against expectations that it would fall to 1.5%. The weak data is a sign of ongoing deflationary pressures in the Chinese economy as industrial overcapacity, weak global demand and falling commodity prices continue to drag prices lower. Producer prices also remained weak, and were unchanged at a 6-year low of -5.9% in October for the third month in a-row.

Industrial production and retail sales data out on Wednesday should provide further clues to the health of the Chinese economy. Although recent data has eased fears that the Chinese economy is heading for a hard landing, there is little evidence to suggest that a turnaround is around the corner.  Today’s weak inflation figures give the People’s Bank of China plenty of room to cut rates further, which have already been cut six times since November 2014.

Expectations of further stimulus by China could boost the aussie in the near term. Healthy domestic demand in Australia that has so far proved more resilient than expected to external pressures, has provided some support to the Australian dollar, which has fallen by around 14% against the US dollar since the start of the year.

The strong housing market is one of the sectors that has been outperforming in the Australian economy. Figures out on Tuesday showed home loans were up 2.0% month-on month in September, versus the no change expected. But the total value of housing finance fell by 1.6% m/m, suggesting that credit growth could be easing and may provide the Reserve Bank of Australia more flexibility to cut its cash rate below 2%.

Also released today was the National Australia Bank’s business confidence survey. The NAB business conditions index was unchanged at 9 in October – an above average reading. However, the business confidence index fell to 2 from 5 in September with a broad deterioration seen across several sectors. There was improvement in finance, property and business, as well as in manufacturing. The mining sector also saw some improvement but remained in negative territory. Despite lacklustre global growth, the NAB report said it was “cautiously optimistic that the gradual recovery in the non-mining sector is gaining traction”.

The aussie has been stuck near 5-week lows against the US dollar since Friday when it fell from around 0.7150 to a low of 0.7022 in the aftermath of the strong US payrolls data. It was up slightly at 0.7052 in mid European trading on Tuesday as it attempted a modest recovery. Against the New Zealand dollar, the aussie held on to its gains from last week when the kiwi tumbled on low dairy prices. The Australian dollar was last trading at 1.0779 against the kiwi.

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