- AUD/USD grips gains near 0.6800 as hotter-than-expected Aussie inflation keeps hopes of RBA leaving interest rates steady this year alive.
- Aussie monthly CPI rose by 3.5%, remained higher than estimates of 3.4% but decelerated from the prior release of 3.8%.
- Investors await the Aussie Retail Sales and US core PCE inflation data for July.
The AUD/USD pair holds onto gains near the round-level figure of 0.6800 in Wednesday’s European session. The Aussie asset posts a fresh seven-month high of 0.6813 after a hotter-than-expected Australian monthly Consumer Price Index (CPI) for July kept market speculation for the Reserve Bank of Australia (RBA) to leave its Official Cash Rate (OCR) steady at 4.35% for the entire year alive.
The inflation date came in the early Asian session on Wednesday and showed that monthly CPI decelerated to 3.5% from 3.8% in June but remained higher than expectations of 3.5%, which appeared insufficient to bring RBA rate cut expectations on the table.
This week, the Australian Dollar (AUD) is expected to show more action as Aussie monthly Retail Sales data for July is lined up for release on Friday. Economists estimate that Retail Sales, a key measure of consumer spending that prompts price pressures, to have grown at a slower pace of 0.3% from 0.5% in June.
Meanwhile, the US Dollar (USD) regains temporary ground after posting a fresh year-to-date (YTD) low. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, delivers a mild recovery from 100.50 to near 100.85.
Investors see the US Dollar’s recovery as a short-lived pullback, with evidence that its near-term outlook is uncertain. The Greenback has remained under pressure as the Federal Reserve (Fed) seems to be prepared to start reducing interest rates from the September meeting, with uncertainty over the likely size by which the central bank will cut its key borrowing rates.
For fresh cues on interest rate cut path, investors await the United States (US) core Personal Consumption Expenditure Inflation (PCE) data for July, which will be published on Friday. The PCE Price Index report is expected to show that the annual core inflation rose by 2.7%, faster than June’s reading of 2.6%, with monthly figures growing steadily by 0.2%.
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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