The Aussie weakened yesterday against the greenback as manufacturing PMI data reported by the Commonwealth Bank signaled contraction in the manufacturing sector. Furthermore, the sharp drop in the price of iron ore and the Chinese delegation’s abrupt cancellation of a visit to the US farmlands also stoked fear that the trade war will take months to resolve.
China is the top trading partner of Australia. Therefore, the strength of the Antipodean currency is heavily dependent on the smooth flow of international trade. From a high of 0.6820, the AUD/USD pair has declined to 0.6762 in the past 24 hours.
The Aussie faced selling pressure early yesterday morning after the economic data indicated a decline in the Commonwealth Bank Flash Manufacturing PMI to 49.4 in September, from 50.9 in the earlier month. A reading below 50 signals contraction, the first one since the monthly survey began in 2016. However, the Commonwealth Bank Flash Services PMI rebounded to 52.5 this month, from 49.1 in August.
The weak economic data released yesterday followed the sharp fall in iron ore prices last week as China’s economy continues to slow down. The raw material for the steel mill closed at $92.56 last week, down 6.7% from the earlier week’s close of $99.30. China has also brought down the quantum of iron ore bought from Iran after the latter hiked levies related to export.
Earlier in September, Iran’s deputy minister had stated that raw materials, including iron ore and ore, concentrate pertaining to steel manufacturing will be subject to a 25% duty to support the local steel industry. The announcement of the import duty hike has resulted in a 37.8% m-o-m drop in iron ore exports to 319,920 tons in August. On a y-o-y basis, iron ore shipments from Iran to China have dropped 23.4% in August.
In addition to weak economic data and a drop in iron ore prices, the developments related to the US-China trade negotiations also affected the Aussie.
Chinese officials unexpectedly canceled their scheduled visit to US farmlands in the Midwest this week and returned to their country. The information was revealed by Rebecca Colnar, official spokesperson of the Montana Farm Bureau Federation.
Ms.Colnar elaborated on the sudden reversals in plans made by Chinese officials. “We were contacted by a delegation of Chinese agriculture officials yesterday morning who said they were visiting Montana next week. This morning, we received word that they would no longer be visiting Montana but would instead, be returning to China sooner than originally planned.”
Considering the planned visit as a gesture of goodwill, the Trump administration had removed tariffs on 437 Chinese goods, including printed circuit boards, dog collars, laminated wood flooring, computer graphics processors and miniature Christmas lights.
On Friday, Trump hinted that he is not in a hurry to reach a trade agreement with China. The US President has stated that the trade dispute, which is more than a year old, will continue into 2020 and even beyond.
Trump said: “I’m not looking for a partial deal. We’re looking for a big deal. We’ve taken it to this level.”
Financial markets had anticipated that a deal could be inked back in May, but discussions broke down abruptly. Since then, both countries have imposed additional duties on thousands of each other’s goods and vowed to target more products by the end of 2019.
Think tanks, business executives, and government officials in both countries opined that even if the forthcoming negotiations result in an agreement in October, the overall scenario has turned into ideological combat that could take years to sort out.
The weak economic data and unresolved US-China trade war are expected to keep the Aussie weak in the days to come.
The AUD/USD pair is declining after facing resistance at 0.6820. The currency pair is also trading below its 50-day moving average, while the RSI indicator is extending towards the bearish zone. As a result, we can expect the currency pair to remain bearish in the short-term.
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