AUD/USD: Australian dollar slips as manufacturing hit by strong contraction

The AUD/USD pair dropped by more than 0.60 per cent after the latest composite PMI data by Markit. The market is also concerned about the brewing trade conflict between Australia and China.

Australia manufacturing and service activity disappoints

Business activity in Australia went through significant challenges in May, according to the latest data from Markit and Commonwealth Bank.

In May, the flash manufacturing PMI in Australia dropped from 44.1 to 42.8. Analysts were hoping to see some improvement since the country started to ease its lockdown in late April. A PMI reading below 50 is usually a sign of contraction.

According to the bank, manufacturers continued to display a reluctance to hold inventories while supply chain delays continued. These issues were particularly prevalent in imported goods.

The ongoing pandemic also led to low order growth, which led to a cut in employees for the fourth straight month. Besides, the survey found some deflationary pressures, especially in the service sector. Manufacturing input prices also continued to soar partly due to currency weakness and higher transportation cost.

The services PMI showed some signs of life. The figure jumped from the previous low of 19.5 to 25.5. Another positive thing was that business confidence in Australia improved. In a statement, Gareth Aird said:

“May should mark the low point in the PMIs, and we would expect activity to lift from here on a monthly basis. Company views on the economic outlook have improved, and the lift in confidence is welcome. That said, it will be a long time before activity returns to pre-COVID-19 levels.”

Analysts expected that the manufacturing and services activity would move in sync with the improving conditions in China. Recent data showed that the country’s industrial production, exports, and imports rose in April.

AUD/USD reacts to China-Australia trade war

The weak manufacturing PMI comes at a time when Australia is having a trade war with China. The conflict started when Australia joined other countries to support a probe into the origins of the coronavirus pandemic. China was irked.

In response, China announced fresh tariffs on Australian barley. The country has started to apply an 80 per cent tariff on barley worth more than $500 million a year. The county imported more than 2.5 million tonnes of barley in 2019. Australia went to the World Trade Organisation.

China justified the new tariffs saying that the tariffs were justified. That is because while Australian barley shipments have jumped by more than 67 per cent, prices have declined by 31 per cent. This, in turn, has affected domestic production.

The concerns are that China will likely go to other items such as copper, coal, and iron ore.

AUD/USD technical outlook

The AUD/USD pair is trading at 0.6563, which is slightly below yesterday’s high of 0.6620. On the daily chart, the price is between 61.8 per cent and 78.6 per cent Fibonacci retracement level. It is also slightly above the 50-day and 100-day exponential moving average. Even with the decline, the AUD/USD remains on a bullish trend, which means that bulls will attempt to test the 78.6% retracement at 0.6700.