- AUD/USD plummets to near 0.6620 as investors worry about China’s economic prospects.
- Firm speculation for RBA to maintain a restrictive interest rate framework for longest fails to support the Australian Dollar.
- The risk-averse market mood improves the US Dollar’s appeal as a safe haven.
The AUD/USD pair extends its losing spell for the seventh trading session on Tuesday. The Aussie asset weakens to near the round-level support of 0.6620 as the Australian Dollar (AUD) has been hit hard, being a liquid proxy of China’s Yuan.
The Chinese economy is going through a vulnerable phase due to weak demand from domestic and the overseas market. The economy expanded at a slower pace of 0.7% in the second quarter than estimates of 1.1% and the prior release of 1.5%.
Meanwhile, concerns over China’s economic prospects deepened after the People’s Bank of China (PBoC) surprisingly came out with a 10 basis points (bps) cut in short-and-long term in Loan Prime Rates (LPRs) on Monday.
China’s poor economic outlook has outweighed the Australian Dollar’s strength that was driven by firm speculation over the Reserve Bank of Australia (RBA) maintaining its monetary policy restrictive for longest among Group of Seven (G-7) economies. Investors also expect that the RBA could hike its Official Cash Rate (OCR) further due to persistent inflationary pressures and stable labor market.
Going forward, investors will focus on preliminary Australian Judo Bank PMI data for July, which will be published on Wednesday.
The market sentiment remains risk-averse amid United States (US) political uncertainty. S&P 500 futures exhibit a subdued performance in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges higher to 104.40.
This week, there are plenty of triggers for the US Dollar, which will scrutinize the appropriateness of current market expectations pointing to rate cuts in September.
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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