- AUD/USD struggles to gain any meaningful traction amid mixed fundamental cues.
- A weaker risk tone caps the Aussie, though a weaker USD lends support to the pair.
- China's Retail Sales increased by 5.1% YoY in April, missing the 5.5% forecast and slowing from March's 5.9% growth.
The AUD/USD pair kicks off the new week on a subdued note and consolidates just above the 0.6400 round-figure mark during the Asian session. Moreover, spot prices remain confined in a familiar range held over the past month or so as traders await a fresh catalyst before positioning for the next leg of a directional move.
The National Bureau of Statistics (NBS) reported on Monday that China’s Retail Sales rose by 5.1% year-over-year (YoY) in April, falling short of the 5.5% forecast and down from 5.9% in March. Industrial Production grew by 6.1% YoY during the same period, beating the expected 5.5% but slowing from the previous 7.7% growth. Meanwhile, Fixed Asset Investment rose 4.0% year-to-date (YTD) YoY in April, below the 4.2% forecast and unchanged from March’s 4.2% reading. The immediate market reaction was limited as the focus remains glued to the crucial Reserve Bank of Australia (RBA) policy decision on Tuesday.
The Australian central bank is widely expected to cut its key rate by 25 basis points (bps) and lower borrowing costs twice more this year amid easing inflation and growth concerns on the back of trade tensions. However, the de-escalation of the US-China trade war has tempered bets for more aggressive policy easing by the RBA.
Nevertheless, the policy outlook will influence the Australian Dollar (AUD) and determine the next leg of a directional move for the AUD/USD pair. Heading into the key central bank event risk, a turnaround in the global risk sentiment – as depicted by a generally weaker tone around the equity markets – is seen capping the Aussie.
A surprise downgrade of the US government's credit rating tempers investors' appetite for riskier assets. Apart from this, bets for more interest rate cuts by the Federal Reserve (Fed) keep the US Dollar (USD) depressed, which, in turn, might continue to act as a tailwind for the AUD/USD pair and warrants some caution for bearish traders.
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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