- AUD/USD recovers sharply from 0.6650 as the RBA is less likely to cut interest rates this year.
- RBA Hauser didn’t offer any interest rate cues and preferred to remain data-dependent.
- The US Dollar clings to gains as traders see the Fed following a moderate policy-easing cycle.
The AUD/USD pair rebounds strongly from the key support of 0.6650 in Tuesday’s European session. The Aussie pair discovers strong buying interest on expectations that the Reserve Bank of Australia (RBA) will continue with a restrictive monetary policy stance for the remainder of the year.
On Monday, RBA Deputy Governor Andrew Hauser cited the strong employment data as a surprise for him. On the monetary policy outlook, RBA Hauser didn’t provide a clear direction and said, “The central bank is ready to respond in either direction depending on incoming data.” The comment from Hauser left doors open for further interest rate hikes.
Meanwhile, a larger-than-expected interest rate cut by the People’s Bank of China (PBoC) has also improved Australia’s economic outlook, given that the nation is the largest trading partner of China. The PBoC reduced its one-year and five-year Loan Prime Rate (LPR) by 25 basis points (bps), while economists were anticipating a 20-bps rate cut.
However, the near-term appeal of the Australian Dollar (AUD) could be hurt by risk-off market sentiment due to uncertainty over the United States (US) presidential elections that are around the corner. S&P 500 futures have posted significant losses in the European session, exhibiting a sharp decline in investors’ risk appetite.
The US Dollar (USD) holds onto gains near a fresh 11-week high as investors expect the Federal Reserve (Fed) to cut interest rates gradually in November and December. The Fed can afford to avoid a sizeable interest rate cut in November, as expected earlier, after a slew of upbeat US economic data for September that diminished economic slowdown risks.
(This story was corrected on October 22 at 13:50 GMT to say, in the last paragraph, that the US Dollar holds onto gains near a fresh 11-week high, not an 11-month high.)
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.
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