- AUD/USD flat lines around 0.6275 in Wednesday’s early Asian session.
- Trump is set on Wednesday to unveil reciprocal tariffs.
- The RBA decided to keep the OCR on hold at 4.10% at its April meeting on Tuesday.
The AUD/USD pair trades on a flat note near 0.6275 during the early Asian session on Wednesday. The markets turn cautious ahead of US President Donald Trump’s announcement of reciprocal tariffs. Also, the US March ADP Employment Change will be published.
Trump is set to implement tariffs on US trading partners on Wednesday, potentially adding more tariffs on Chinese goods. Trump has already placed a total of 20% tariffs on all Chinese imports since taking office in January, blaming Beijing for failing to do enough to curb the flow of chemicals used to make the deadly drug fentanyl into the US. The potential trade war between the US and China might exert some selling pressure on the Aussie, as China is a major trading partner to Australia.
The Reserve Bank of Australia (RBA) kept the Official Cash Rate (OCR) on hold at 4.10% following the conclusion of its April policy meeting on Tuesday. The RBA’s monetary policy statement showed that the board is concerned and cautious about whether inflation will continue to moderate.
RBA Governor Michele Bullock said during the press conference that policymakers have to be careful not to get ahead of themselves on policy. Bullock added that the board did not discuss a rate cut and did not make up its mind on a May move.
Meanwhile, the encouraging Chinese economic data provides some support to the China-proxy Aussie. China’s Caixin Manufacturing PMI improved to 51.2 in March from 50.8 in February. This reading was better than the expectation of 51.1.
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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