Australian Dollar,AUD/USD, China PPI, CPI, Iron Ore, US Dollar, USD/CNY – Talking Points
- China’s CPI and PPI beat estimates and a gap presents policy hurdles
- PPI is still outstripping CPI, compressing company profitability
- If the US Dollar continues strengthening, what will it mean for AUD/USD?
The Australian Dollar tried to nudge higher as Chinese CPI came in at 2.1% year-over-year to the end of April against 1.8% forecast and March’s print of 1.5%. PPI came in at 8.0%, instead of 7.8% expected and 8.3% previously.
This presents a conundrum for policy makers that are trying to stimulate growth while seeking to contain price pressures.
Prices paid at the factory gate remain well above prices paid at the cash registers. Businesses are left with a conundrum as they grapple to either pass on the increase in costs to consumers or absorb a lower profit margin.
China’s CSI 300 equity index has lost a third of its value since its peak a year ago. According to data from Bloomberg, gross margin for the index has shrunk from a high of 20.7% to 17.6% estimated for this year.
This probably reflects the structure of an economy that can exert influence to protect consumers from inflationary pressures.
In other parts of the world, high PPI readings have wound up in higher CPI. We have not seen this yet in China.
With strict Covid-19 lockdowns remaining in place for the world’s second largest economy, the growth outlook for China remains a concern for global trade.
The Australian Dollar is vulnerable to these sways in perception of China’s prospects. Combined with the recent bout of risk aversion the Aussie made fresh lows yesterday, trading at levels not seen since July 2020.
Much has been made of the perception of the Chinese slowdown being reflected in the iron ore futures price. Particularly in the context of the impact on the Australian Dollar.
The iron price on both of the Dalian commodity exchange (DCE) and the Singapore exchange (SGX) have peeled off from recent highs, but still remain a long way from the lows seen last November.
Commodities, more broadly, have recently weakened due to the strengthening of the US Dollar. USD/CNY is at it’s highest level since November 2020, trading above 6.7300.
Looking at the chart below and comparing the Australian Dollar against the iron ore price (SGX) and the US Dollar index (DXY), the current weakness in the Aussie appears more likely to be the result of a rising USD.
This is not surprising given the speed of hikes coming from the Fed.
AUD/USD, IRON ORE (SGX) AND US DOLLAR (DXY)
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter