Australian Dollar Lags on Chinese PMI Disappointment

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The Australian Dollar was a laggard on global foreign exchange markets after Chinese activity data for October disappointed.

The importance of Chinese data to the Australian Dollar was confirmed by the negative response to news China's official manufacturing PMI slipped back into contractionary territory in October, down to 49.5 from 50.2.

The market had been expecting a reading of 50.2. The disappointment sees the Australian Dollar trade lower against all G10 peers - besides the Yen, which is struggling following the Bank of Japan policy update - at the time of writing.

"The BoJ disappointed investors by making only a minor tweak to its YCC, which led to the JPY underperforming the rest of the G10 during the Asian session. Weak China PMI data meant the AUD was not far behind the JPY," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The slide back into contraction territory will see investors question whether a run of improved data prints has come to an end.

China's economy has struggled to rebound ever since Covid restrictions were fully lifted at the turn of this year, disappointing markets looking for a post-Covid boom. But, through the summer months, a turnaround in data suggested 'peak pessimism' towards China had now passed.

The disappointing PMI data has resulted in a weaker Aussie Dollar:

Above: AUD performance on October 31.

The non-manufacturing PMI also disappointed investors as it declined to 50.6 from 51.7; the market was looking for a more expansionary 51.8.

"The property market negatively contributed to the reading, while infrastructure activity remained robust. The further loss of momentum in economic activity will put pressure on both the government and the PBoC to boost their support to the economy," says a market note from UniCredit Bank.

The Pound to Australian Dollar exchange rate is 0.20% higher on the day at 1.9115, the Euro to Australian Dollar exchange rate is higher by 0.38% at 1.6707, the Australian Dollar to U.S. Dollar rate is lower by a quarter of a per cent at 0.6357.

The China Caixin PMI is due for release tomorrow, which should offer another insight into the current state of the economy.

Kristina Clifton, a foreign exchange strategist at Commonwealth Bank of Australia, warns against investing too much in the October PMIs.

"The Chinese official PMIs were weaker than expected in October. However the weaker readings likely reflect the eight day holiday at the start of the month rather than a setback in the economic recovery," she says.

If correct, the weakness in AUD and China-linked assets might prove limited from here.

"We expect a gradual recovery in the Chinese economy to continue over the coming months," says Clifton.