- AUD/USD rises slightly to near 0.6500 as the RBA delivers a hawkish interest rate guidance.
- The near-term outlook of the US Dollar remains uncertain on firm Fed rate-cut prospects.
- Investors see the Fed reducing interest rates by 50 bps in September.
The AUD/USD pair gains slightly to near the psychological figure of 0.6500 in Tuesday’s New York session. The Aussie asset moves higher despite a sharp recovery in the US Dollar (USD), suggesting sheer strength in the Australian Dollar (RBA) in the aftermath of monetary policy announcement by the Reserve Bank of Australia (RBA).
The RBA left its Official Cash Rate (OCR) unchanged at 4.35% for the sixth time in a row, as expected. However, the RBA delivered hawkish guidance on interest rates as price pressures are significantly higher than bank’s target of 2%. The Australian Consumer Price Index (CPI) accelerated to 3.8% in the second quarter on an annualized basis.
In the monetary policy statement, the RBA said, “Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range. Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out,” Reuters reported.
Meanwhile, the US Dollar moves higher but the near-term outlook remains uncertain. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to near 103.00. Growing speculation that the Federal Reserve (Fed) will pursue an aggressive policy-easing stance could dampen the US Dollar’s recovery.
Currently, financial markets expect that the Fed will cut its key borrowing rates by 50 basis points (bps) to 4.75%-5.00% in the September meeting. The Fed is also expected to reduce interest rates by more than 100 bps this year.
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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