HomeContributorsFundamental AnalysisAustralian Dollar Dips as China's Inflation Declines

Australian Dollar Dips as China’s Inflation Declines

The Australian dollar has edged lower after China posted a soft inflation report. In the European session, AUD/USD is trading at 0.6509, down 0.18%.

The new year hasn’t brought much cheer to the Australian dollar, which hasn’t had a winning week in 2024. Earlier in the week, The Australian dollar dropped below the 0.65 line for the first time since mid-November. The slowdown in China, Australia’s largest export market, is weighing on the struggling Aussie.

China’s CPI falls to 14-year low

China’s consumer prices continued to slide and dropped in January by 0.8% y/y, the steepest decline since September 2009. This was lower than the market estimate of -0.5% and marked a fourth straight decline. The main driver of the downswing was lower food prices. Monthly, CPI rose 0.3%, up from 0.1% in December and below the market estimate of 0.4%. Producer prices fell by 2.5% y/y in January, the sharpest decline in four months.

The world’s second-largest economy is in a deflationary mode and there is the danger that deflation is becoming entrenched. Domestic consumption has weakened and confidence is falling, as evidenced by the massive drop in the Chinese stock market. Deflation was virtually unheard of prior to the Covid pandemic, but China’s shaky recovery has resulted in prolonged deflation.

The weak global economy has meant decreased demand for Chinese exports and this has hammered the manufacturing sector. Manufacturing activity contracted for a fourth straight month in January. The non-manufacturing PMI rose to 50.7 in January, up from 50.3, indicating stagnation.

China’s government has taken some steps to kick-start growth, such as slashing bank reserves and injecting those funds into the banking system, but more dramatic moves may be needed, such as lowering interest rates.

Reserve Bank of Australia Governor Bullock will testify before a House committee later today and traders will be looking for hints about the RBA’s future rate path. The RBA kept rates unchanged for a third time earlier this week and does not appear in any rush to lower rates.

AUD/USD Technical

  • 0.6546 and 0.6590 are the next resistance lines
  • 0.6468 and 0.6424 and providing support

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