Australian Dollar Lower on Evergrande Bankruptcy

Evergrande's bankruptcy raises concerns of contagion in the Chinese economy, impacting the Australian dollar and global markets.

The Australian dollar has been on a downward trend, closing lower for eight consecutive days and experiencing a decline of 230 basis points during that time. This negative movement continued on Friday, with AUD/USD trading at 0.6390 in the European session, down 0.20%. With no significant Australian or US releases expected for the day, a relatively calm day for AUD/USD is anticipated.

The Chinese economy has been facing a series of challenges in recent weeks, including a decline in exports and imports, a slump in domestic demand, and soft services and manufacturing data. The latest blow comes from Evergrande, one of China's largest property developers, which filed for bankruptcy in New York on Thursday. The company's default on its massive debt in 2021 triggered a property crisis in China and had a detrimental impact on the country's financial system. This bankruptcy has raised concerns about the potential spread of China's property sector problems to the rest of the economy, which is already grappling with deflation and weak growth.

The Evergrande bankruptcy has heightened fears of contagion in the Chinese economy, mirroring the concerns that arose when the company initially defaulted on its debt. Australia, as China's largest trading partner, is particularly vulnerable to economic developments in China. A slowdown in the Chinese economy translates to reduced demand for Australian exports, contributing to the significant 4.93% decline in the Australian dollar throughout August.

In the United States, there was unexpected positive news from the manufacturing sector on Thursday. Manufacturing has been struggling globally due to high inflation and weak demand. However, the Philly Fed Manufacturing report for August delivered impressive results, with a reading of +12, a significant improvement from July's -13.5 and surpassing the consensus estimate of -10 points. This positive development in the US manufacturing sector brings a glimmer of hope amidst the global manufacturing downturn.