AUD/USD rebounds from multi-month low, finds support ahead of 0.6500 mark

AUD/USD slumps to a multi-month low amid the Trump enthusiasm-led USD rally.
Fears of fresh tariffs and trade war with China further exert pressure on the Aussie.
The RBA’s hawkish stance and the risk-on impulse help limit losses for the major.

The AUD/USD pair trims a part of heavy intraday losses and recovers around 70-75 pips from the vicinity of the 0.6500 psychological mark, or its lowest level since August 8 touched earlier this Wednesday. Spot prices, however, remain deep in negative territory through the first half of the European session and currently trade just below the 0.6600 mark, still down over 0.85% for the day.

The sharp intraday fall of over 130 pips for the AUD/USD pair was led by a strong pickup in the US Dollar (USD) demand. In fact, the USD Index (DXY) shot to a four-month top after the US presidential election exit polls showed that Republican nominee Donald Trump is leading the race. Furthermore, Republicans are projected to take the majority of the House after securing the Senate.

Meanwhile, a Trump presidency revives fears about the launch of fresh tariffs and a trade war with China, which further weighs on the China-proxy Australian Dollar (AUD). Moreover, deficit-spending concerns and bets for smaller rate cuts by the Federal Reserve (Fed) push the US Treasury bond yields higher, further underpinning the USD and exerting pressure on the AUD/USD pair.

That said, the risk-on impulse – as depicted by a sharp rally in the US equity futures – prompts some profit-taking around the safe-haven Greenback. Apart from this, the Reserve Bank of Australia's (RBA) hawkish stance and signs that China's big stimulus push is helping improve business conditions limit losses for the Aussie, prompting intraday short-covering around the AUD/USD pair.

It, however, remains to be seen if spot prices can build on momentum or if the attempted recovery is seen as a selling opportunity amid the underlying strong bullish sentiment surrounding the USD. Hence, it will be prudent to wait for strong follow-through buying before confirming that the AUD/USD pair has formed a near-term bottom and positioning for any further appreciating move.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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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