- The Assie ticks up but so far remains dangerously close to the two-month low at 0.6580.
- The US Dollar is trimming some gains, as investors brace for a data-packed week in the US.
- Ongoing concerns about China’s weak outlook are likely to weigh on a potential Aussie recovery.
Australian Dollar is going through a mild recovery on Monday’s early European session, favoured by a somewhat softer US Dollar as investors brace for a data-packed week in the US.
Data released on Friday support the idea that further Fed easing will be gradual. Durable Goods orders contracted less than forecasted with Non-Defence Capital Goods ex Aircraft beating expectations. The Michigan Consumer Sentiment Index also improved beyond expectations.
Investors, however, are likely to grow cautious ahead of a batch of key US indicators with Q3 GDP on Wednesday, the PCE Prices Index on Thursday and the Nonfarm Payrolls report on Friday.
In Australia, the impact of the hawkish rhetoric from the RBA is being offset by ongoing concerns about China. Data released this weekend revealed that industrial profits fell 27% year-on-year highlighting the erratic recovery of Australia’s main trading partner and hindering a significant Aussie rebound.
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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