AUD/USD posts modest losses below 0.6550 as RBA delivers dovish cut
- AUD/USD softens to around 0.6530 in Wednesday’s early Asian session.
- RBA cut its OCR by 25 bps on Tuesday and downgraded the annual economic outlook for the country.
- US CPI rose 2.7% YoY in July, softer than expected.
The AUD/USD pair trades with mild losses near 0.6530 during the early Asian session on Wednesday. The Australian Dollar (AUD) edges lower against the Greenback after the Reserve Bank of Australia (RBA) delivered a dovish rate cut at its August meeting. Traders will keep an eye on Fedspeak later on Wednesday.
As widely expected, the RBA cut its Official Cash Rate (OCR) by a quarter point to 3.60% from 3.85% and signaled further policy easing might be needed to meet its inflation and employment targets as the economy lost some momentum. The Australian central bank also downgrades its economic growth forecast for 2025 to 1.7% from 2.1%, saying that a weaker-than-expected rise in public demand in early 2025 was unlikely to be offset through the rest of the year.
Swaps imply just a 34% possibility that the RBA would follow up with a September cut, although two more rate reductions by early next year are fully priced in to 3.1%
Data released by the US Bureau of Labor Statistics (BLS) on Tuesday showed that the US Consumer Price Index (CPI) rose 2.7% on a yearly basis in July, versus 2.7% prior. This reading came in softer than the market expectation of 2.8%. Meanwhile, the annual core CPI climbed by 3.1% in July, compared to the 2.9% rise seen in June, above the market consensus of 3%.
Futures market pricing is pointing strongly to a Federal Reserve (Fed) rate cut in September, which might weigh on the US Dollar (USD) and cap the downside for the pair. Traders will take more cues from the speeches from Fed officials later on Wednesday, including Austan Goolsbee and Raphael Bostic.
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
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
