AUD Outlook: RBA Rate Hike Bets Collide with Weak China PMI

The Australian Dollar is trading at the center of a macroeconomic storm, caught between domestic inflationary pressures necessitating tighter policy and deteriorating growth metrics from China, its primary trading partner.

China: Manufacturing Engines Stall

Data released Monday paints a grim picture. China's official manufacturing PMI fell to 49.3 in January, missing forecasts and sinking deeper into contraction territory below 50.0.

Even more concerning for commodity exporters, the non-manufacturing PMI slipped to 49.4, marking a 37-month low.

For the AUD, widely traded as a liquid proxy for Chinese growth, the soft data presents a structural headwind. The contraction suggests reduced demand for iron ore and energy.

Data Snapshot

• Manufacturing PMI: 49.3 (Contraction)
• Non-manufacturing PMI: 49.4 (37-month low)
• Target OCR: 3.85%

RBA Set to Pull the Trigger

Conversely, the Reserve Bank of Australia (RBA) appears ready to diverge from the global pause. Markets are pricing in a high probability that the RBA will raise the Official Cash Rate (OCR) to 3.85% from 3.6% at its upcoming February meeting.

While global peers are weighing cuts, Australian inflation remains sticky, forcing the central bank's hand. This yield advantage typically supports the AUD, but the currencys price action suggests traders are struggling to reconcile the Hawkish RBA thesis with the Slowing China reality.

Analyst View

Rabobank notes that despite the economic headwinds, the Chinese Renminbi (CNY) has shown resilience due to Beijing's internationalization push. However, for the AUD/USD, the upside may be limited until Chinese demand metrics show a convincing turnaround.