- AUD/USD drops from 0.6800 with Aussie inflation in focus.
- The monthly Australian CPI is expected to have declined to 3.4% in July from 3.8% in June.
- Investors see the Fed starting to reduce interest rates in September.
The AUD/USD pair slides from the monthly high of 0.6800 in Monday’s European session. The Aussie asset drops as the Australian Dollar (AUD) weakens amid uncertainty ahead of the monthly Consumer Price Index (CPI) data for July, which will be published on Wednesday.
The inflation data is expected to show that the annual CPI decelerated to 3.4% from 3.8% in June, which will prompt expectations that the Reserve Bank of Australia (RBA) could consider interest rate cuts this year.
The recent release of the RBA minutes indicated that the RBA is unlikely to cut its Official Cash Rate (OCR) in the remaining year as it will remain vigilant to upside risks to inflation.
Meanwhile, upbeat market sentiment fails to uplift the Australian Dollar. The market mood seems favorable for risky assets as traders have fully priced in the Federal Reserve (Fed) interest rate cuts in September. S&P 500 futures have posted decent gains in the European session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges high after posting a fresh year-to-date (YTD) low of 100.53.
Market speculation for Fed interest rate cuts appears to be certain as Fed Chair Jerome Powell said in his speech at the Jackson Hole (JH) Symposium on Friday, “The time has come for policy to adjust.”
Going forward, investors will focus on the US Durable Goods Orders data for July, which will be published at 12:30 GMT. New Orders for Durable Goods, a key measure of core consumer inflation, is estimated to have grown at a robust pace of 4% after a significant decline in June.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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