- AUD/USD extends the rally around 0.6675 in Monday’s early Asian session.
- The US Core PCE inflation rose 2.6% YoY in May, compared to 2.6% in April.
- The stubborn inflation in Australia pushed back the expectation that the RBA would cut rates, boosting the Aussie.
The AUD/USD pair trades on a stronger note near 0.6675 during the early Asian session on Monday. The growing speculation that the US Federal Reserve (Fed) would cut interest rates in 2024 weighs on the Greenback across the board.
Inflation in the United States eased to its lowest annual rate in more than three years. The US Personal Consumption Expenditures (PCE) Price Index increased 2.6% YoY in May, compared to 2.7% in April, according to the US Bureau of Economic Analysis on Friday. This figure came in line with market expectations. The core PCE inflation rose 2.6% YoY in May from 2.8% in April, in line with estimation.
The US inflation report indicated a slow downward trend in consumer price growth in the US, triggering the chance of a Fed rate cut later this year. This, in turn, exerts some selling pressure on the US Dollar (USD) and acts as a headwind for AUD/USD. Investors are now pricing in 53% odds that the Fed will cut rates in the September meeting, according to the CME FedWatch tool.
On the Aussie front, the elevated inflation in Australia pushed back the expectation that the Reserve Bank of Australia (RBA) would cut the interest rate, which lifts the Australian Dollar (AUD). Last week, RBA Assistant Governor Christopher Kent said that the Australian central bank is alert to upside risks to inflation and wants to see evidence of a further easing in inflation before considering interest rate cuts. The RBA is foreseen to delay rate cuts, making it one of the last G10 country central banks to adopt a reduction policy. These delayed cuts might enhance the further strengthening of the Aussie.
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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