- AUD/USD renews seven-month highs above 0.6800 after Australian CPI cools less than expected.
- The US Dollar recovers as risk sentiment deteriorates ahead of Fedspeak and Nvidia earnings report.
- AUD/USD daily technical setup points to more gains in the offing in the near term.
AUD/USD is paring back gains to trade near 0.6800 in Asian trading on Wednesday, having reversed a spike to a new seven-month high of 0.6813.
AUD/USD cheers Australian CPI data
The Aussie pair caught a fresh bid wave and recaptured the 0.6800 barrier following the Australian monthly Consumer Price Index (CPI) data release.
The inflation data showed that consumer prices in Australia cooled at a slower pace than expected in July, reporting a 3.5% YoY growth when compared to a 3.4% increase estimated and June’s 3.8% acceleration.
Hot Australian inflation data re-kindled expectations of further interest-rate hikes from the Reserve Bank of Australia (RBA), fuelling a fresh leg up in the Aussie Dollar (AUD).
However, a risk-averse market environment limited the upside in the higher-yielding Aussie while lifting the haven demand for the US Dollar (USD).
Markets are anxious heading into the much-awaited US AI giant’s, Nvidia. Earning reports, leading to a decline in the global stocks. Traders also await a slew of speeches from the US Federal Reserve (Fed) official for fresh cues on the magnitude of the upcoming rate cut in September.
Looking ahead, the pair will remain at the mercy of the Fedspeak-driven USD price action and the broader market sentiment, gearing up for Thursday’s Australian Private Capex data for the second quarter.
Technically, AUD/USD remains poised for more upside, as the 14-day Relative Strength Index (RSI) points north above the 50 level while just beneath the overbought region, currently near 67. Further, a couple of bullish crossovers on the daily time frame also add credence to the constructive outlook for the Aussie.
AUD/USD: Daily chart
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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