Australian Dollar Weakens as Does CFLP PMI

AustralianDollarsThe Australian Dollar surprised all by weakening slightly, in spite of the AIG manufacturing index recording a rise. The most likely reason for this was a drop in the purchasing managers index (PMI) of the China Federation of Logistics and Purchases (CFLP).

After all, the Australian currency is linked very closely to that of China given the high volume of trade between the two countries. The Yen traded 102.35 against the US Dollar at a rise of 0.31%. The Australian Dollar traded 0.7594 against the US Dollar, down 0.16%.

The PMI of the manufacturing industry in China is released by the China Federation of Logistics and Purchasing and the National Bureau of Statistics. It fell short of the expected level of 50, instead expanding only to 49.9. The non-manufacturing PMI from the CFLP, on the other hand, touched 53.9, an increase over the previous month’s level of 53.7.

The CFLP PMI is semi-official whereas Caixin is the official one. The Caixin manufacturing PMI is expected to be 48.7, a slight increase over the previous month’s 48.6.

The China PMI is closely watched since China is the world’s biggest metal consumer as well as producer. Being the world’s second largest economy, the Chinese market is observed quite closely at all times. A few months ago in December 2015, fresh fears over China’s economic growth were triggered. Due to this, markets around the region responded!

China’s CMI had fallen to 48.2, the lowest since August. In August, it was at a healthy 51.5, but the decline was evident as it fell to 50.5 in September and 48.3 in October. November witnessed a slight rise when it was 48.6, but fell again in December!

The AIG manufacturing index indicated robust growth in July at a figure of 56.4 which was a substantial increase over the previous month’s figure of 51.8. As a matter of fact, the index is expected to rise further, following the trend of 13 months consecutive rise. It has to be pointed out here that this period of expansion hasn’t happened over a decade.

The main reason for the steady incline in growth is the country’s attractive exchange rate that boosts exports and gives replacements for imports. Furthermore, according to the Housing Industry Association (HIA), sales of new homes jumped 8.2% in June. This was a surprising rebound coming on the back of a two month slump. The housing industry had declined 4.4% in May.

The U.S. dollar also increased in strength, as could be seen from the 0.04% rise of the US Dollar Index to 95.57. The currency had taken a beating last week on account of reports that economic growth was only 1.2% as opposed to the expected 2.6%. It is unlikely that the US Federal Reserve will increase interest rates. Furthermore, the Federal Reserve hasn’t provided any indication of a hike in interest rates at any time during the year. All indications are that there aren’t any short term risks to the US economy.

The Yen climbed as a result of disappointing market reaction to a newly released Bank of Japan stimulus package. There had been expectations of an aggressive easing of the economy. However, the BOJ will be reviewing its existing policies soon.

The coming week will see the release of important financial data including nonfarm payrolls data from the US and an ISM report on activity in the manufacturing and service sectors. The Bank of England will release new rates on Thursday and the majority opinion is that the bank will take steps to stimulate the economy, a much needed step to deal with the tremors created by the vote for Brexit.