China’s Services Purchasing Managers’ Index (PMI) fell to 52.1 in March from 56.7 in February, according to data published by RatingDog on Friday. The reading was below the forecast of 53.7.
The Australian Dollar rose slightly after the release. AUD/USD was up 0.11% on the day at 0.6910 at the time of writing.
Key Drivers Of The Australian Dollar
The Australian Dollar is influenced by interest rates set by the Reserve Bank of Australia (RBA), prices for iron ore, and economic conditions in China. Inflation, economic growth and Australia’s trade balance can also affect the currency, alongside broader market risk appetite.
The RBA targets inflation of 2–3% by adjusting interest rates. It may also use quantitative easing or tightening to change credit conditions.
China is Australia’s largest trading partner, and shifts in Chinese growth can affect demand for Australian goods and the AUD. Iron ore is Australia’s biggest export, worth $118 billion a year using 2021 data, and price moves can affect the currency.
Australia’s trade balance reflects export earnings versus import payments. A surplus can support the AUD, while a deficit can weigh on it.
Trading Implications For Aud Usd
China’s service sector activity slowed more than we expected in March, with the PMI dropping to 52.1. This figure fell short of the 53.7 forecast and is a significant step down from February’s performance. As traders, we see this as a direct warning sign for Australian export demand in the coming quarter.
This slowdown in China is likely a key factor in the recent pressure on iron ore prices, which we have seen fall over 10% in the last month to near $105 per tonne. Since iron ore is Australia’s largest export, this price decline directly weighs on the country’s trade balance and the value of the Aussie dollar. We saw a similar pattern in late 2025 when concerns about Chinese construction activity dragged down commodity prices.
With this weak data from our largest trading partner, we anticipate the Reserve Bank of Australia will have to adopt a more cautious tone at its meeting next week. This contrasts with the US Federal Reserve, which continues to signal its focus remains on inflation, creating a policy divergence that favors the US dollar. This divergence is a major theme we are trading on for the second quarter.
Given this backdrop, we should consider strategies that benefit from potential downside in the AUD/USD pair. Buying put options offers a way to profit from a decline while capping our risk, which is prudent ahead of the RBA decision and the upcoming Australian Q1 inflation data later this month. This strategy allows us to position for weakness without being exposed to unlimited losses if the market moves against us.
Despite these fundamental headwinds, the Australian dollar has shown some resilience, holding around the 0.69 level for now. This suggests that broader market risk sentiment is currently stable, providing some temporary support. However, we believe this support is fragile and that the combined impact of weaker Chinese data and falling iron ore prices points to increasing weakness in the coming weeks.
