China's RatingDog Manufacturing Purchasing Managers’ Index (PMI) rose to 51.5 in August from 50.9 in July, surpassing the market forecast of 50.9 and signaling expansion in the sector [1][2]. This data had divergent impacts on the currencies of China’s close trading partners: the Australian Dollar (AUD) strengthened for a second consecutive day, with AUD/USD trading around 0.7170 during Asian hours on Tuesday [2]. In contrast, the New Zealand Dollar (NZD) remained subdued, with NZD/USD depreciating to around 0.5910 after minor gains the previous day [1].
Australia’s domestic data showed building permits fell 3.6% month-over-month in July, a smaller decline than the expected 4.8%, while total dwelling unit approvals increased 9% year-over-year, slightly above the prior 8.9% [2]. For New Zealand, strategists at Brown Brothers Harriman expect the Reserve Bank of New Zealand (RBNZ) to deliver a back-to-back 25 basis point Official Cash Rate hike to 2.75% on Wednesday, citing above-target headline inflation and an improved domestic growth outlook [1].
Both the AUD and NZD faced headwinds from a rebounding US Dollar, driven by hawkish sentiment surrounding the US Federal Reserve (Fed). Traders increased bets on a September Fed rate hike after Warsh stated the Fed will "have work to do" if policymakers are not confident that underlying inflation is returning to its 2% target [1][2]. The CME FedWatch Tool now prices in a greater than 66% probability of a September rate hike, up from approximately 41% a week earlier [1].
Fed officials, including Goolsbee, delivered a moderately hawkish message, emphasizing persistent inflation and the challenge of demand-driven price pressures. Goolsbee's FXS Speechtracker score was 6.2/10, marginally above the 6.1/10 historical average, and the FXS Fed Sentiment Index slipped by 0.41 points to 129.29, indicating a slight softening in perceived hawkishness but remaining well above the neutral threshold [1][2]. Strategists at Scotiabank noted that recent Fed commentary has clarified the inflation target and warned that unless inflation progresses toward 2% "with speed," further tightening could occur [2].
Investors are also preparing for upcoming US economic data releases, including manufacturing and services sector updates and the crucial August Nonfarm Payrolls report, which could further influence monetary policy expectations [1].
CONCLUSION
Stronger Chinese PMI data provided support for the Australian Dollar but failed to lift the New Zealand Dollar, as both currencies contended with a resurgent US Dollar amid heightened Fed rate hike expectations. Market sentiment remains cautious, with attention turning to upcoming US economic data and central bank decisions that could further sway currency movements.