Forex - Australian dollar weakens after China HSBC flash PMI drops

Investing.com - The Australian dollar retraced early gains in Asia on Monday and weakened after the China HSBC Flash Purchasing Managers Index for March unexpectedly fell, signalling a rougher road for exports to China, particularly resources such as iron ore.

The HSBC data for March showed a drop to 48.1, compared to a forecast of 48.7 expected and to a final of 48.5 for the previous month. A figure below 50 implies contraction with the the latest number part of a string of disappointing China data suggesting a deepening economic slowdown at the start of 2014.

"The HSBC Flash China Manufacturing PMI reading for March suggests that China's growth momentum continued to slow down. Weakness is broadly based with domestic demand softening further," said HSBC chief China economist Qu Hongbin.

"We expect Beijing to launch a series of policy measures to stabilize growth. Likely options include lowering entry barriers for private investment, targeted spending on subways, air cleaning and public housing, and guiding lending rates lower."

AUD/USD traded at 0.9070, down 0.13%, after the data from positive territory early in the day, while USD/JPY changed hands at 102.54, up 0.28%.

The US Dollar Index, which tracks the performance of the greenback versus a basket of six other major currencies, traded up 0.03% to 80.31 from flat earlier in the day.

Last week, the U.S. dollar fell against the Canadian dollar as the release of stronger-than-expected Canadian inflation data eased pressure on the Bank of Canada to cut interest rates.

USD/CAD slid 0.18% last week to settle at 1.1220, backing off the four-and-a-half year peaks of 1.1277 reached on Thursday.

The Canadian dollar found support after Statistics Canada reported that consumer prices rose 0.8% in February, up from 0.3% in January. Analysts had forecast a 0.6% rise.

On a year-over-year basis, inflation slowed to 1.1%, from 1.5% in January.

The loonie, as the Canadian dollar is also known, received an additional boost after a separate report showed that Canadian retail sales rose 1.3% in January, recouping some of the previous months 1.9% decline. Market expectations had been for an increase of 0.8%.

The dollar rose to its highest level against the loonie since July 2009 on Thursday, buoyed up by expectations that the Federal Reserve could hike interest rates earlier than previously thought.

The dollar strengthened across the board Wednesday after Fed Chairwoamn Janet Yellen indicated that the bank could begin to raise interest rates about six months after its bond-buying program winds up, which is expected to happen this fall.

The comments prompted investors to bring forward expectations for a rate hike to as soon as March of next year.

The Fed also reduced its monthly bond purchases by an additional $10 billion to $55 billion at the conclusion of its two-day policy meeting, and said there was “underlying strength in the broader economy.”

In the coming week, investors will be looking ahead to U.S. data from the housing sector, as well as reports on consumer confidence and durable goods. Canada is not scheduled to release any economic reports.

On Monday, the U.S. is to release preliminary data on manufacturing activity.