- AUD/USD turns sideways after refreshing an 11-week low near 0.6540 ahead of US NFP data.
- The uncertainty over the US presidential elections has weakened the appeal of risk-sensitive assets.
- Inflationary pressures in Australia decelerated sharply in the third quarter of the year.
The AUD/USD pair trades sideways above more than 11-week low of 0.6540 in Thursday’s European session. The Aussie asset consolidates as investors await United States (US) Nonfarm Payrolls (NFP) data for October, which will influence market expectations for the Federal Reserve (Fed) interest rate path in the remainder of the year.
Market sentiment remains risk-averse as investors turn cautious ahead of US presidential elections on November 5. While national polls have indicated tough competition between former President Donald Trump and current Vice President Kamala Harris, traders seem to be pricing in Trump’s victory. Trump is expected to implement protectionist policies, which will have a significant impact on nations that are leading trading partners of the US.
S&P500 futures have posted significant losses in the European session, exhibiting the weak risk appetite of investors. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops slightly below 104.00.
The US NFP report is expected to show that the economy added 115K jobs lower than 254K in September, with the Unemployment Rate remaining steady at 4.1% on Friday. Investors will also focus on the US ISM Manufacturing PMI for October, which is expected to have contracted again but at a slower pace to 47.6 from 47.2 in September.
In the Aussie region, slower-than-expected inflation growth in the third quarter of the year has pushed back market expectations for the Reserve Bank of Australia (RBA) keeping its Official Cash Rate (OCR) at its current levels for a longer period. Year-on-year Consumer Price Index (CPI) decelerated at a faster-than-expected pace to 2.8% from 3.8% in the previous quarter of the year. Annual Trimmed Mean CPI, which is RBA’s preferred inflation gauge, grew slower by 3.5%, as expected.
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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