- AUD/USD edges higher to near 0.6575 in Monday’s early Asian session.
- The RBA’s hawkish tone and hotter-than-expected Chinese CPI inflation data support the Aussie.
- Rising Middle East geopolitical tensions might cap the pair’s upside.
The AUD/USD pair trades on a stronger note near 0.6575 during the early Asian session on Monday. The hawkish messages from the Reserve Bank of Australia (RBA) and hotter Chinese inflation data provide some support to the Aussie. However, the escalating geopolitical tensions in the Middle East might cap the upside for the pair.
The RBA left the interest rate unchanged at 4.35% for a sixth consecutive meeting last week. RBA governor Michele Bullock noted the upside risks to inflation and will not hesitate to raise rates if it needs to. Westpac analysts forecast the first-rate cut will occur in February 2025 from the previously expected November 2024. The hawkish stance of the Australian Central Bank is likely to underpin the Australian Dollar (AUD) in the near term.
Additionally, China’s Consumer Price Index (CPI) rose by a more-than-expected 0.5% in July from a year ago due to seasonal factors like weather, lifting the AUD. Nonetheless, concerns about sluggish Chinese demand persist and might limit the pair’s upside. Traders will take more cues from Chinese Retail Sales and Industrial Production on Thursday. Also, the Australian employment data will be released.
On the other hand, markets remain convinced the Federal Reserve (Fed) will start easing monetary policy at its upcoming meeting in September. The CME FedWatch Tool showed the possibility of a 50 basis points (bps) interest rate cut by the Fed at the September meeting at 52.5%, down from 57.5% a day ago.
Defence Minister Yoav Gallant informed US Defense Secretary Lloyd Austin on Sunday that Iran's military preparations indicated the country is preparing for a large-scale strike on Israel, according to Axios writer Barak Ravid on X, citing a person familiar with the call. Any signs of rising geopolitical risks might boost safe-haven flows and benefit the Greenback.
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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