Australian Dollar extends gains, upside limited
- AUD edges up to 0.6180 on Tuesday, off multi-year lows.
- Fed rate-hold expectations in January underpin the US Dollar.
- Soft Australian fundamentals, China slowdown cap Aussie recovery.
The Australian Dollar (AUD) rebounded from 0.6130, its lowest level since April 2020, to reach 0.6180 on Tuesday, buoyed by firm commodity prices and a slight improvement in market sentiment. Despite this partial comeback, the pair still remains vulnerable amid a dovish Reserve Bank of Australia (RBA) and an uncertain local economic outlook.
Daily digest market movers: Aussie sees some light after soft PPI data from the US
- The US Dollar Index (DXY) retreats after Monday’s gains but keeps an overall firm tone, supported by the Fed’s likely rate hold in January.
- Producer Price Index (PPI) data in the US rose 3.3% year-over-year for December, missing the 3.4% forecast; core PPI reached 3.5%, also below estimates.
- Following the data, US Treasury yields dropped, favouring the pair’s upside, but the USD’s outlook remains favourable.
- Consumer Price Index data on Wednesday will be key for the pair’s trajectory.
AUD/USD technical outlook: Bulls eye 20-day SMA as pair hovers near oversold territory
The Relative Strength Index (RSI) stands at 42, rising sharply but still in negative territory, while the Moving Average Convergence Divergence (MACD) histogram prints flat red bars, indicating only modest relief for bulls. While the Aussie has managed to halt its latest losing streak, the pair remains near April 2020 lows. Any sustained recovery may require a clear break above the 20-day Simple Moving Average (SMA), which is currently acting as a barrier to further upside.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
