AUD/USD extends four-day winning streak, focus shifts to US-China trade talks
- AUD/USD advances to near 0.6580 as the Australian Dollar trades firmly.
- Investors eye US-China trade talks that are scheduled for next week.
- The RBA is expected to cut interest rates in the near term.
The AUD/USD pair extends its winning streak for the fourth trading day on Wednesday. The Aussie pair jumps to near 0.6580 as the Australian Dollar (AUD) outperforms across the board amid a cheerful market mood.
The risk-appetite of investors has increased as the United States (US) has confirmed a trade deal with Japan, with concessions on baseline and automobile tariffs. Trump stated through a post on Truth.Social on Tuesday that a deal with Tokyo has been confirmed and announced a reduction in the baseline tariff to 15% from 25% stated in the letter sent to Japan at the start of the week. According to a report from NHK, Japanese automakers will face 15% tariffs on exports to the US, lower than 25% that is applicable for all imports foreign cars and auto-components.
Meanwhile, investors await trade talks between Washington and Beijing scheduled for next week. Given that the Australian economy relies heavily on its exports to China, an improvement in Beijing’s business outlook bodes well for the Australian Dollar.
On Tuesday, US Treasury Secretary Scott Bessent confirmed that officials from Washington and Beijing will meet next week in Stockholm to rebalance the US-China trade relationship, Reuters reported.
On the domestic front, dovish Reserve Bank of Australia (RBA) minutes of the policy meeting that took place earlier this month have signaled that officials are comfortable with interest rate cuts in the near term.
Meanwhile, the US Dollar (USD) trades cautiously near its two-week low even as the US-Japan trade agreement has been confirmed. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, seems vulnerable near 97.40.
Going forward, investors will focus on preliminary Australian and US PMI data for July, which is scheduled to release on Thursday.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
