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The Australian dollar enjoyed a recovery following the much stronger than expected inflation numbers. However, the move to higher levels lasted less than a day, and AUD/USD is back down under 0.88.

The trigger was a weaker than expected figure from China: the Flash Markit HSBC Manufacturing PMI dropped below 50 points, thus pointing to contraction for the first time in 6 months. Will the Aussie fall to new 3 year lows?

Here is the chart showing the new downfall of the Aussie after the previous climb:

Australian dollar down under January 23 2014 after Chinese PMI technical forex graph

This PMI is highly regarded as it is independent. While this is only the flash and not the final figure, the initial publication has a stronger impact. The market had expected a small rise from 50.5 to 50.6 points.

Australia wishes to move from dependency on China to more varied economic model, but for the time being, demand from the economic giant has a huge impact. Undoubtedly, the RBA is stuck between a rock and a hard place: between rising inflation and lower economic prospects.

AUD/USD was already below the high levels of 0.8890 it reached after the CPI release, but the Chinese PMI sent it below 0.88.

0.8756 is the key level on the downside: it is the recent 3 year low. On the topside, 0.8830 works as resistance.

For more, see the AUD forecast.