- AUD/USD falls vertically below 0.6750 amid risk-off mood.
- The US Dollar gains ahead of the US ISM Manufacturing PMI for August.
- The Australian Dollar will be guided by RBA Bullock’s speech on Thursday.
The AUD/USD pair plunges below the crucial support of 0.6750 in Tuesday’s European session. The Aussie asset has been hit hard as the US Dollar (USD) extends its upside ahead of a slew of United States (US) economic data this week.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, inches closer to a two-week high of 102.00. Meanwhile, the market sentiment remains risk-averse as speculation for the Federal Reserve (Fed) to start reducing interest rates this month aggressively has eased. S&P 500 futures have posted significant losses in European trading hours.
Traders see a little chance that the Fed will cut interest rates by 50 basis points (bps) this month as the revised estimate for the United States (US) Q2 Gross Domestic Product (GDP) growth showed that the economy at a faster pace of 3% than flash estimates of 2.8% on an annualized basis.
For fresh cues on the Fed interest rate cut path, investors await the US Nonfarm Payrolls (NFP) data for August, which will be published on Friday. In Tuesday’s session, investors will focus on the US ISM Manufacturing PMI for August, which will be published at 14:00 GMT. Activities in the manufacturing sector are expected to have contracted at a slower pace, with the PMI coming in at 47.5 from July’s reading of 46.8.
Meanwhile, the Australian Dollar (AUD) weakens as the current market mood bodes poorly for risky assets. On the domestic front, the major trigger for the Aussie will be the Q2 GDP data, which will be published on Wednesday. The Australian economy is estimated to have expanded at a faster pace of 0.3% than 0.1% growth registered in the January-March period.
This week, investors will also focus on Reserve Bank of Australia (RBA) Governor Michele Bullock’s speech on Thursday. Investors will look for fresh cues about whether the RBA will pivot to policy normalization this year.
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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