- AUD/USD recovers to 0.6571 after dipping, despite central bank actions.
- BoJ hikes, SNB cuts rates, and other central banks are steady.
- Mixed US data: manufacturing up, services, and composite PMIs down.
- Market eyes June Fed cut, post-steady rate projections.
The Australian Dollar (AUD) tumbled against the US Dollar (USD) on Thursday despite refreshing weekly highs at 0.6634, printed losses of 0.25%. However, as Friday’s Asian session begins, the AUD/USD exchanges hands at 0.6571, virtually unchanged as traders brace for the weekend.
Australian Dollar holds near weekly lows amid mixed global monetary policy moves
A tranche of central banks adjusted their monetary policy throughout the weekend, led by the Bank of Japan, the Reserve Bank of Australia, the Federal Reserve, the Bank of England and the Swiss National Bank. Most of them kept rates unchanged, being the outliers of the BoJ and the SNB. The former raised rates for the first time in almost two decades, while the latter was the first major central bank to cut interest rates.
Data-wise, the US economic schedule featured March S&P Global PMIs, with the services and the composite index, missing estimates but standing at expansionary territory. On a positive note, manufacturing activity accelerated to its fastest pace in almost two years. Elsewhere, the US labor market continued to show signs of tightness despite the recent withholding according to February’s Nonfarm Payrolls figures. Initial Jobless Claims for the week ending March 16 fell to 210k versus 212k the week prior.
Aside from this, market participants seem convinced they overreacted post-Federal Reserve’s decision to withhold the federal funds rate (FFR) unchanged at the 5.25%-5.50% range. The Fed Dot-Plots failed to deliver a hawkish stance, keeping three cut rates on the table for 2024, spurring a jump in interest rate cut expectations for June, which sit at around 80%.
On the Aussie’s front, the docket is empty, though proxies like the data from New Zealand would feature the Balance of Trade and Japan’s Consumer Price Index (CPI) for February.
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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