AUD to USD Forecast: Australian Dollar Eyes China Manufacturing PMI Impact

Highlighting concerns, ANZ-Indeed job ads suggested a deterioration in Australian labor market conditions in May.

Will another slide in job ads signal an Australian economic recession to test the RBA commitment to bring inflation to target?

Australian Job Ads and the RBA Inflation Fight

On Monday, July 1, Australian ANZ-Indeed job ads may impact buyer demand for the AUD/USD.

Economists forecast job ads to decline by 1.2% in May after tumbling by 2.1% in April.

Another sharp decline in job ads could signal a weakening Australian labor market. A deteriorating labor market could affect wages and reduce disposable income. Downward trends in disposable income could curb consumer spending and dampen demand-driven inflation.

Navigating Inflation Without Harming Employment

Moreover, with private consumption contributing over 50% to the Australian economy, a slump in consumer spending may topple the Australian economy.

In June, the RBA discussed hiking rates to tackle the elevated inflation environment. The battle to tame inflation while avoiding an adverse impact on the labor market could face scrutiny.

For context, job ads jumped by 2.8% in April after two consecutive declines in February and March.

Expert Insights: The Australian Economy on the Brink

Last week, Sky News Business Editor Ros Greenwood discussed the Australian economy and the RBA rate path, stating,

“Notwithstanding the fact that the economy is barely teetering above a recession right now with the last quarter just 0.1 of a percent – in this quarter probably negative. The reality is that you’d expect under normal circumstances the Reserve Bank would come to the rescue, start to cut interest rates, and get some economic growth going – well it can’t do that right now.”

The Australian economy last contracted in H1 2020 because of COVID-19. It was the first technical recession in almost 30 years.

Alongside Australian labor market data, investors should also closely watch private-sector PMIs from China.

Will the China Caixin Manufacturing PMI spook the markets with an unexpected drop below 50?

The Role of Chinese Economic Data

On Sunday, June 30, NBS private sector PMIs signaled a weakening Chinese economy. The NBS Manufacturing PMI remained unchanged at 49.5 in June. However, the NBS Services PMI fell from 51.1 in May to 50.5 in June.

The Sunday numbers could increase market sensitivity to the Caixin Manufacturing PMI out on Monday.

A larger-than-expected fall in the Caixin Manufacturing PMI could affect buyer demand for the Aussie dollar.

Economists forecast the Caixin Manufacturing PMI to decline from 51.7 in May to 51.2 in June. A waning Chinese private sector activity could impact Australian trade terms and the economy.

Australia has a trade-to-GDP ratio above 50%, with 20% of its workforce in trade-related jobs.

The Caixin Manufacturing PMI last contracted in October 2023, with a PMI of 49.5.

The RBA Rate Path – Rate Cut or Rate Hike?

Last month, the RBA left the cash rate at 4.35%. Nevertheless, RBA Governor Michele Bullock warned that Board members discussed a rate hike during the RBA monetary policy meeting.

Could a deteriorating Australian labor market and a weaker demand outlook from China temper investor bets on a 2024 RBA rate hike?

Westpac Chief Economist Luci Ellis recently forecasted a first RBA interest rate cut in November, saying:

“But we don’t think they’re going to be in a hurry. And we don’t think they will be cutting quickly from there – it will be a very measured pace once it starts.”

Shifting focus to the US dollar, upcoming manufacturing sector data.

A US Manufacturing Sector Rebound?

Later in the session on Monday, the US ISM Manufacturing PMI will garner investor attention. Economists forecast the ISM Manufacturing PMI to increase from 48.7 in May to 49.0 in June.

Surpassing the 50 threshold would indicate a shift towards expansion, bolstering investor confidence in a soft landing scenario. However, these figures are unlikely to influence the Fed rate path.

The manufacturing sector represents less than 30% of the US economy, limiting its influence on monetary policy.

For perspective, the ISM Manufacturing PMI remained under 50 throughout Q4 2023, signaling sector contraction. Despite this, the US economy grew by 3.4% in the same quarter, prompting the Fed to maintain higher interest rates for an extended period.

Additional data includes final S&P Global Manufacturing PMI figures for June. Any revisions to preliminary numbers could impact sentiment towards the US economy.

The preliminary survey showed the S&P Global Manufacturing PMI climbing from 51.3 to 51.7.

While these statistics may have minimal effect on the USD/JPY, statements from FOMC Members could potentially influence market movements.

Short-Term Forecast

Near-term AUD/USD trends will hinge on Australian labor market data and the PMI numbers from China. Softer labor market data and signals of weaker demand from China could temper investor bets on an RBA rate hike. Increasing threats of an Australian economic recession would affect buyer demand for the Aussie dollar.

AUD/USD Price Action

Daily Chart

The AUD/USD remained well above the 50-day and 200-day EMAs, affirming the bullish price signals.

An AUD/USD move through the $0.67003 resistance level would support an AUD/USD return to the $0.67500 handle. Additionally, a breakout from $0.67500 could signal a move toward the $0.67967 resistance level.

Australian labor market data, private sector PMIs from China, and FOMC Member commentary need consideration.

Conversely, an AUD/USD fall through the $0.66500 handle could give the bears a run at the 50-day EMA. A break below the 50-day EMA could signal a drop to the 200-day EMA and the $0.65760 support level.

With a 14-period Daily RSI reading of 57.01, the AUD could climb to the $0.67500 handle before entering overbought territory.