Australian Dollar edges higher to near 0.7250 on hawkish RBA tone, eyes on Trump-Xi summit
- AUD/USD drifts higher to near 0.7240 in Wednesday’s Asian session.
- The hawkish RBA tone underpins the Aussie.
- Traders will keep an eye on the US PPI inflation report and Trump-Xi summit later this week.
The AUD/USD pair gains ground to around 0.7240 during the Asian trading hours on Wednesday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) amid a hawkish stance from the Reserve Bank of Australia (RBA).
The Australian central bank decided to raise the interest rates to 4.35% on May 5, marking its third consecutive hike this year, in line with market expectations. This tightening cycle continues to provide some support to the Aussie in the near term.
"Our economists expect the RBA to remain on hold in a 'wait-and-see' mode; however, further domestic fiscal support could increase the likelihood of additional tightening,” said HSBC economists.
Traders will closely monitor the US President Donald Trump-Chinese Xi Jinping meeting in Beijing on Thursday and Friday. Trump said on Tuesday that he would prioritize trade discussions during his summit with Chinese President Xi Jinping and downplayed the amount of attention they would devote to the Iran war, per Bloomberg. However, any positive developments surrounding the US and China talks could boost the China-proxy Australian Dollar.
On the USD’s front, data released by the US Bureau of Labor Statistics (BLS) on Tuesday revealed that annual inflation in the US, as measured by the change in the Consumer Price Index (CPI), jumped to 3.8% in April from 3.3% in March. This reading came in above the market consensus of 3.7% and registered the highest since May 2023.
Traders raised the odds for a Federal Reserve (Fed) rate hike by the end of the year to about 30% following the hot US inflation data, according to the CME FedWatch tool.
The US Producer Price Index (PPI) report will be the highlight later on Wednesday. The headline US PPI is expected to show a rise of 4.9% YoY in April, compared to 4.0% in March, while the core PPI is projected to show an increase of 4.3% YoY in April versus 3.8% prior.
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.
