Australian Dollar holds steady amid soft consumer sentiment
- The Australian Dollar held ground despite consumer sentiment dropping 4.7% in October, its second consecutive monthly decline.
- Crude oil prices fell as G7 nations released 100 million barrels of emergency reserves to ease inflation fears.
- Fresh Houthi missile and drone strikes against Saudi Arabian targets could boost safe-haven demand for the US Dollar.
AUD/USD remains steady after two days of gains, trading around 0.6970 during Asian hours on Tuesday. The currency pair is hovering in a tight range as the Australian Dollar (AUD) finds support despite local economic headwinds. The Westpac–Melbourne Institute Consumer Sentiment Index dropped 4.7% month-over-month in October, marking its second consecutive monthly drop, though it showed a minor improvement over September’s 5.2% decline.
Meanwhile, the US Dollar (USD) is keeping its ground against major rivals amid shifting commodity and inflation dynamics. A retreat in oil prices, driven by signals of expanding supply out of the Middle East, has helped soothe market anxiety over rising inflation and the likelihood of tighter monetary policy.
Global efforts to bolster energy supply have contributed significantly to this price drop. Following pressure from US President Donald Trump, G7 nations agreed on Friday to tap into emergency reserves and release 100 million barrels of crude and diesel while pledging not to restrict energy exports. Tracking data indicates this release will supplement Middle Eastern crude exports, which surged past pre-war levels during most of the final week of September.
Nevertheless, fresh geopolitical flare-ups in the region could reignite safe-haven demand for the US Dollar. According to Xinhua News Agency, Yemen’s Houthi group claimed responsibility on Monday for launching coordinated attacks using drones, ballistic missiles, and cruise missiles against Saudi Arabian military installations, an oil facility, and key airports. Houthi spokesman Yahya Saree stated that one of the strikes successfully hit King Khalid International Airport in Riyadh, disrupting air traffic and injecting new tension into global markets.
HSBC highlights profit-led dynamics behind stubborn US inflation
Strategists at HSBC argue that US inflation, which “remains high” and is often blamed on “surging oil and computing costs, as well as the lingering impact of tariffs,” looks different when viewed through the lens of the gross value-added deflator. This measure, they note, captures inflation generated by “profits, wages, and non-labour related costs” and “offers a different perspective.” On this basis, HSBC finds that “the latest acceleration in headline inflation appears to have been driven mainly by stronger profit growth,” rather than solely by traditional cost pressures.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
