Australian Dollar Forecast to Struggle on Chinese Stock Values, Market Sentiment

January 5, 2016 - Written by James Fuller

STORY LINK Australian Dollar Forecast to Struggle on Chinese Stock Values, Market Sentiment

Chinese Stocks Tumble as Manufacturing Output Extends Contraction

After Monday’s Asian session closed, the Shanghai Composite Index slumped close to -6.9%. This weighed heavily on trader risk appetite as global stock prices followed suit and commodity prices depreciated.

The drop in Chinese stock values can be linked to disappointing domestic data. December’s Chinese Manufacturing PMI failed to meet with the median market forecast rise from 48.6 to 48.9, with the actual result dropping to 48.2. Anything below the 50 mark is contraction.

As a risk-correlated asset, the Australian Dollar slumped in response to significantly dampened trader sentiment.

In addition to falling Chinese stock values causing trader risk-appetite to cool, geopolitical tensions in the Middle East continues to bolster safe-haven demand. Saudi Arabia has broken off diplomatic ties with Iran which has sent oil and gold prices higher, but most commodities lower.

One positive, for those invested in the Australian Dollar, is rising iron ore prices after production in the National Mineral Development Corporation’s biggest iron-ore mine located in Chhattisgarh’s Dantewada district halted following a workers strike.

Australian Dollar May Benefit from PBoC Intervention

Although weakness from China will weigh on trader risk-appetite, there is the potential for ‘Aussie’ (AUD) gains if the People’s Bank of China (PBoC) opt to stimulate an economic recovery. The Chinese economy is set to grow at its slowest pace in a quarter of a century, suggesting that both the government and the PBoC will have no choice but to expand stimulus.

Official intervention from China’s government and the PBoC is supportive of demand for the Australian Dollar amid speculation that heightened efforts to provoke more impressive economic growth will cause increased demand for Australia’s exports.

Chinese Economic Data to Provoke Australian Dollar Volatility this Week

Over the coming week there will be a number of Australian and Chinese economic data publications with the potential to provoke significant Australian Dollar volatility.

Australia’s Performance of Service Index, Building Approvals, Trade Balance, Performance of Construction Index and Retail Sales data should all be of interest to those invested in the ‘Aussie’.

In addition, China’s Consumer Prices, Trade Balance, Foreign Direct Investment, Services PMI and Composite PMI will also be significant for those trading with the Oceanic currency.

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