- AUD/USD trades in positive territory for three straight days near 0.6715 in Thursday’s early European session.
- The upbeat Australian economic data fueled arguments that the RBA could raise interest rates again.
- The cautious stance from the Fed officials might help limit the USD’s downside.
The AUD/USD pair gathers strength around 0.6715 during the early European session on Thursday. The uptick of the Australian Dollar (AUD) is bolstered by the encouraging Retail Sales data for May, which spurred the case for a rate hike by the Reserve Bank of Australia (RBA).
Australia’s Retail Sales growth was stronger than expected in May, fueling to arguments that the Australian central bank could raise interest rates as early as August. The nation’s Retail Sales rose 0.6% MoM in May from the previous reading of a 0.1% increase, according to the Australian Bureau of Statistics (ABS) on Wednesday. Additionally, the rise of Aussie is attributed to the Judo Bank's Australia Purchasing Managers Index (PMI) reports, which improved slightly in June.
On the other hand, the weaker-than-expected US economist dada continues to drag the Greenback lower. The US Services PMI declined to 48.8 in June from 53.8 in the previous reading, below the market consensus of 52.5, the Institute for Supply Management (ISM) showed on Wednesday.
However, the cautious stance from the Federal Reserve (Fed) officials might lift the USD and cap the pair’s upside. Chicago Fed President Austan Goolsbee said early Thursday that getting inflation back to 2% will take time and there is still much data to be had on the economy.
Meanwhile, the minutes of the FOMC June monetary policy meeting showed that the Fed officials lacked the confidence they needed to cut the interest rate. “Some participants emphasized the Committee’s data-dependent approach, with monetary policy decisions being conditional on the evolution of the economy rather than being on a preset path,” the minutes showed. Financial markets are now pricing in a nearly 66% chance for a 25 basis points (bps) Fed rate cut in September, up from 63% on Tuesday, according to the CME FedWatch tool.
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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