Australian Dollar (AUD) Broadly Stronger ? Will it Hold Gains?

A number of factors pushed the Australian Dollar higher against peers like the Pound and US Dollar yesterday. Firstly, demand for the commodity-driven currency increased after Federal Reserve Chairwoman Janet Yellen did little to encourage speculation that the central bank will be increasing interest rates in the summer (as was initially projected). Secondly, China’s Manufacturing PMI pushed back above the 50 mark separating growth from contraction in February, taking industry experts by surprise. The gauge of the Chinese manufacturing sector had been expected to slip further into contraction territory.

Finally, Australia’s Skilled Vacancies, Construction Work Done and Wage Cost data either printed above or in-line with forecasts. HSBC economist Hongbin Qu said of the Chinese data; ‘The HSBC China Manufacturing PMI improved slightly to 50.1 in the flash reading for February, up from 49.7 in January. Domestic demand firmed while new export orders contracted for the first time since April 2014. Both input and output prices remain in contraction. Today's data point to a marginal improvement in the Chinese manufacturing sector going into the Chinese New Year period in February. However, domestic economic activity is likely to remain sluggish and external demand looks uncertain. We believe more policy easing is still warranted at the current stage to support growth.’

Meanwhile, analyst Matt Simpson had this to say of the Australian Dollar’s uptrend; ‘Chinese flash PMI came out and it's above 50, showing that the Chinese economy has expanded. Output and new orders are all increasing at faster rates. It’s also the fact that we had Janet Yellen talking last night. She wasn't as hawkish as some people wanted. That had a weaker effect on the US dollar and that carried on Wednesday morning. The Chinese PMI was an added bonus and it gave the Aussie a leg up.’

During the Australasian session the Australian Dollar could extend gains if Australia’s average weekly wages and private capital expenditure figures show improvement. Investors with an interest in the Australian Dollar will also be keeping a close eye on the US Consumer Price Index, scheduled for release at 13:30 GMT. A markedly slower pace of inflation could prevent the Fed from increasing interest rates and lend support to higher-risk currencies.