The Chinese manufacturing sector has contracted in March as per the preliminary HSBC/Markit purchasing managers' index, weakening the Australian dollar.
The PMI fell to an 11-month low of 49.2 in March from 50.7 in February. The consensus was for 50.5, showing that analysts had been expecting the sector to continue expanding. The final print will be out after a week.
The AUD/USD slipped to 0.7837 from Monday's (23 March) close of 0.7880 which was its highest since late February. Signs that demand in China is weakening will adversely impact Australia as its export revenue is mostly from shipments to China.
Despite the support from lower global oil prices which eased input prices, muted client demand has forced firms to pass on savings to boost new work, and cut their selling prices at a similarly sharp rate, Markit said.
"The HSBC PMI signalled a slight deterioration in the health of China's manufacturing sector in March," said Annabel Fiddes, economist at Markit.
"A renewed fall in total new business contributed to a weaker expansion of output, while companies continued to trim their workforce numbers."
The strength in the US dollar amid noteworthy Fed comments aided the drop in the Australian currency. The USD index has edged higher to 97.30 early Tuesday (24 March) in Asia from the previous close of 97.01.
San Francisco Fed President John Williams said a discussion should happen mid-year about tightening policy, but he lowered his economic growth forecast to about 2.5% from 3% earlier. Williams votes on FOMC policy this year.
He said he expected an improving economy to push wages and prices up, and inflation to move back toward the Fed's 2% target.