Australian Dollar hangs near two-month low vs USD ahead of China's Trade Balance data

AUD/USD remains on the defensive and reduced RBA rate hike bets counter softer USD.
A halt in fighting between Israel and Iran undermines demand for the safe-haven buck.
Peace deal uncertainty and hawkish Fed bets limit USD losses ahead of US inflation data.

Haresh Menghani FXStreet

The AUD/USD pair struggles to capitalize on the previous day's modest bounce from its lowest level since April 13 and drifts lower during the Asian session on Tuesday. Spot prices currently trade around the 0.7040-0.7035 region and seem vulnerable amid the underlying bullish sentiment surrounding the US Dollar (USD).

The global risk sentiment got a minor lift late Monday after Iran and Israel announced a halt in fighting for now. However, the geopolitical uncertainty persists as the US and Iran remain at odds over key issues, including Tehran's nuclear program and the Strait of Hormuz. This helps limit the safe-haven US Dollar's (USD) corrective slide from over a two-month high, touched on Monday, and acts as a headwind for the AUD/USD pair.

Furthermore, hawkish US Federal Reserve (Fed) expectations turn out to be another factor underpinning the Greenback. In fact, traders are currently pricing in over a 70% chance that the US central bank will raise borrowing costs by the end of this year. This, along with diminishing odds for an interest rate hike by the Reserve Bank of Australia (RBA) in June, exerts some pressure on the Australian Dollar (AUD) and the AUD/USD pair.

The attention this week will be on the closely-watched US Consumer Price Index (CPI) and Producer Price Index (PPI) reports for May, scheduled on Wednesday and Thursday, respectively. The crucial US inflation figures will play a key role in influencing expectations about the Fed's future policy path amid a still resilient US labor market and the economy. This, in turn, should provide a fresh impetus to the USD and the AUD/USD pair.

In the meantime, the recent breakdown below a technically significant 200-day Simple Moving Average (SMA) favors bearish traders and suggests that the path of least resistance for the AUD/USD pair is to the downside. Hence, any attempted recovery move is more likely to be sold into and remain capped as traders look to China’s Trade Balance data for short-term opportunities.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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