- AUD/USD tumbles to near 0.6600 on multiple headwinds.
- China’s poor economic outlook, sliding iron ore prices, and weak Aussie Judo Bank flash PMI have weighed heavily on the Australian Dollar.
- The US Dollar will dance to the tunes of the US PCE inflation report for June.
The AUD/USD pair extends its losing spell for the eighth trading session on Wednesday. The Aussie asset remains in the bearish trajectory due to multiple headwinds. China’s weak economic prospects, sliding base metals’ prices, and weak Judo Bank flash PMI have weighed heavily on the Australian Dollar (AUD).
The Australian Dollar has faced an intense sell-off due to China’s poor economic outlook. China’s Q2 Gross Domestic Product (GDP) grew weaker than projected due to vulnerable demand from domestic and in the overseas market. Concerns over GDP growth of world’s second-largest economy remaining sluggish deepened after a surprise rate-cut decision by the People’s Bank of China (PBoC) on Monday and an absence of significant spending measures in the Third Plenum. Being a proxy for China’s economic prospects, the Australian Dollar has been hit in the last few trading sessions.
Meanwhile, China’s poor economic outlook has resulted in a sharp fall in prices of base metals. Iron ore prices have hit their lowest level in three weeks. This has brought a negative impact on the Australian Dollar, being the largest exporter of the base metal in the world.
In early Asian trading hours on Wednesday, the preliminary Judo Bank PMI report showed that the Composite PMI dropped to 50.2 from the former release of 50.7. The Manufacturing PMI improved slightly to 47.4 but contracted again. A figure below the 50.0 threshold is considered a contraction in manufacturing activities. The Service PMI expanded at a slower pace to 50.8 from the former release of 51.2.
Dismal market sentiment has also kept pressure on the Aussie asset. While the US Dollar (USD) clings to gains due to deepening United States (US) political uncertainty. The US Dollar Index (DXY) grips gains to near 104.50.
This week, investors will keenly focus on the Personal Consumption Expenditure Price Index (PCE) data for June, which will be published on Friday. The inflation gauge will indicate whether current market expectations that the Federal Reserve (Fed) to begin reducing interest rates from September are appropriate.
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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