- AUD/USD edges lower to near 0.6580 in Monday’s early Asian session.
- The weaker Chinese economic data and Trump’s proposals to raise tariffs drag the China-proxy Aussie lower.
- The preliminary University of Michigan's Consumer Sentiment Index came in better than expected in November.
The AUD/USD pair remains under selling pressure around 0.6580 during the early Asian session on Monday. The weaker-than-expected Chinese economic data and Trump tariff threats weigh on the China-proxy Australian Dollar (AUD) against the Greenback. The US October Consumer Price Index (CPI) and Australian employment data will be the highlights for this week.
China's CPI inflation rose at the slowest pace in four months in October, while Producer Price deflation deepened, the National Bureau of Statistics of China showed on Saturday. The slowdown comes as Chinese authorities seek to boost domestic activity as a property crisis weighs on confidence. Furthermore, Donald Trump’s proposals to raise tariffs on Chinese goods might exert some selling pressure on the Aussie as China is a major trading partner to Australia.
On the other hand, the preliminary University of Michigan's Consumer Sentiment Index improved to 73.0 in November from 70.5 in October, better than the market expectation of 71.0. This upbeat report has boosted the Greenback broadly.
Investors expect a less dovish Federal Reserve (Fed) as Trump will likely follow through with his plans to enact significant tariffs. This might prompt inflation and will keep the Fed from cutting rates as much as the officials would have, which could boost the USD.
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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