- AUD/USD trades on a weaker note near 0.6610 in Wednesday’s early Asian session.
- The mixed Australian Judo Bank PMI and Chinese economic woes continue to undermine the Aussie.
- Rising bets on Fed rate cuts in September might cap the pair’s downside.
The AUD/USD pair trades in negative territory for the seventh consecutive day around 0.6610 on Wednesday during the early Asian session. The mixed flash Australia’s Judo Bank Purchasing Managers Index (PMI) fails to boost the Aussie. Traders await the US preliminary S&P Global PMIs for June for fresh impetus.
Data released by Judo Bank and S&P Global on Wednesday revealed that the first reading of Australia's Judo Bank Manufacturing PMI improved to 47.4 in July from 47.2 in June. Meanwhile, the Services PMI dropped to 50.8 in July from the previous reading of 51.2. The Composite PMI declined to 50.2 in July from 50.7 in June.
Sluggish Chinese economic activity has exerted some selling pressure on the Australian Dollar (AUD) over the past weeks, along with the fall in iron to the lowest since early April. Furthermore, a surprise rate cut by the People's Bank of China (PBoC) on Monday triggered concerns about the weak Chinese economy.
Nonetheless, the growing speculation that the US Federal Reserve (Fed) would start cutting the interest rate in September might weigh on the US Dollar (USD) and cap the downside for AUD/USD. Traders are now pricing in nearly a 96% odds of a Fed rate cut in September, according to the CME FedWatch Tool.
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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