Australian Dollar softens to near 0.7200 as Trump and Xi set for second day of talks
- AUD/USD weakens to around 0.7205 in Friday’s early Asian session.
- Traders will closely monitor Trump's second and final day of talks with Chinese President Xi Jinping in Beijing.
- Hotter-than-expected inflation reports have prompted markets to price out rate cuts later this year.
The AUD/USD pair attracts some sellers to near 0.7205 during the early Asian trading hours on Friday. Markets remain cautious ahead of the second day meeting between US President Donald Trump and Chinese President Xi Jinping in Beijing on Friday.
Trump said on Friday that China’s leader Xi likely has power to sway Iran, adding that he’s not going to be much more patient on Iran, per Reuters.
Earlier Thursday, Trump stated that China’s leader Xi Jinping had offered to help negotiate an end to the war with Iran and keep the Strait of Hormuz open to global shipping. However, US President said he hoped the relationship between the US and China would be "stronger and better than ever before.”
The focus is on Taiwan, as Xi warned the US President that mishandling China's claims on Taiwan could cause "clashes and even conflicts" as the disputed island has been a major point of discussion amid the talks. Any signs of tensions between the US and China could undermine the China-proxy Aussie, as China is a major trading partner for Australia.
Recent accelerating US inflation data have reinforced expectations that the US Federal Reserve (Fed) will maintain high interest rates for an extended period, supporting the US Dollar (USD). Markets are now pricing in nearly a 32.9% probability that the Fed will raise the interest rate by at least 25 basis points (bps) at the December meeting, up from 22.5% a week ago, according to the CME FedWatch tool.
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.
