- AUD/USD trades near 0.6520 at the time of writing, with US-China relations increasing demand for commodity-linked currencies.
- Australia’s Westpac Consumer Confidence disappoints, but improving sentiment limits AUD losses.
- The US Consumer Price Index (CPI) on Wednesday is expected to drive the Fed narrative and US Dollar demand.
The Australian Dollar (AUD) is consolidating against the US Dollar on Tuesday, as AUD/USD trades above 0.6500 at the time of writing.
Developments in US-China trade talks in London continued to support risk sentiment, boosting demand. Although the improved relations provided some support for the US Dollar, AUD/USD benefited from Australia’s close ties with China.
With senior officials from both countries signaling progress, the talks have helped improve broader risk sentiment, offering the Aussie some support in the face of weaker domestic data. On Tuesday, Westpac Consumer Confidence index data for June dropped to 0.5%, down from 2.2% in May, signaling a notable decline in household sentiment.
However, since China is Australia’s largest trading partner, easing tensions between the US and China also helps support demand for commodities, a prominent driver of the AUD/USD price pair.
US CPI and Fed expectations provide an additional headwind for the Greenback
Looking ahead, markets remain focused on the monetary policy divergence between the Federal Reserve(Fed) and the Reserve Bank of Australia (RBA).
On Wednesday, the United States will release the Consumer Price Index (CPI) for May, which is expected to inform expectations for the Fed.
Headline inflation is projected to rise to 0.3% MoM in May, up from 0.2% in April, with the annual rate climbing to 2.5% from 2.3%.
Core CPI, which strips out food and energy prices, is also forecast to increase 0.3% MoM, compared to 0.2% previously, with the annual reading rising to 2.9% from 2.8%.
According to the CME FedWatch Tool, market participants expect the Fed to leave interest rates unchanged within the current 4.25% to 4.50% range at both the June and July meetings, with a 53.6% probability of a rate cut priced in for September.
If inflation shows additional signs of easing, the Fed could adopt a more flexible approach to its monetary path, which could ease near-term rate expectations. Softer rate expectations could support the AUD, while rising inflation will likely solidify a pushback in Fed rate cut bets, providing support for the US Dollar.
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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