AUD/USD weakens to below 0.6550 as China’s deflation concerns persist
- AUD/USD softens to near 0.6520 in Monday’s early Asian session.
- China's PPI fell more than expected in July, while CPI was unchanged.
- The RBA rate decision and US CPI inflation report will be the highlights later on Tuesday.
The AUD/USD pair trades on a softer note around 0.6520 during the early Asian session on Monday. The Australian Dollar (AUD) edges lower against the US Dollar as concerns about China’s deflation persist. All eyes will be on the Reserve Bank of Australia (RBA) interest rate decision later on Tuesday.
Data released by the National Bureau of Statistics of China reported on Saturday showed that China’s Consumer Price Index (CPI) was unchanged at an annual rate in July after rising 0.1% in June. The figure came in above the market consensus of -0.1%.
Meanwhile, the Producer Price Index (PPI) fell 3.6% YoY in July, compared to a 3.6% decline in May. The data came in lower than the market consensus of -3.3%. These reports suggested the impact of sluggish domestic demand and persistent trade uncertainty on consumer sentiment, weighing on the China-proxy Aussie, as China is a major trading partner of Australia.
The RBA is expected to cut its Official Cash Rate (OCR) by 25 basis points (bps) to 3.6% at its August meeting on Tuesday from 3.85%. The markets expect RBA Governor Michele Bullock to stick with her cautious stance on the monetary policy outlook.
On the USD’s front, weakening US economic data prompted traders to price in the possibility of more interest rate cuts this year. Markets are now pricing in nearly an 89% odds of a Fed rate reduction at the September meeting and are pricing in 58 bps in cuts by year-end. Traders will take more cues from the US CPI inflation for July, which is due on Tuesday.
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.
