- AUD/USD strengthens near 0.6790 in Thursday’s early Asian session.
- Australia’s private capital spending dropped by 2.2% in Q2 vs. 1.0% prior, weaker than expected.
- The second estimate of US Q2 GDP growth numbers will be in the spotlight on Thursday.
The AUD/USD pair trades on a stronger note around 0.6790 on Thursday during the Asian trading hours. The hotter-than-expected Australian CPI inflation data push back the expectation of a rate cut by the Reserve Bank of Australia (RBA) and provide some support to the Aussie.
Australia’s private capital spending dropped by 2.2% in the second quarter (Q2) from an increase of 1.0% in the previous quarter, the Australian Bureau of Statistics showed Thursday. This figure was below the estimation of 1.0%. Meanwhile, spending on buildings and structures slid by 3.8%, while plant and machinery declined by 0.5%.
The Australian inflation data on Wednesday appeared insufficient to trigger the Reserve Bank of Australia (RBA) rate cut expectations, which has lifted the Aussie against the USD. The country’s monthly CPI inflation eased to 3.5% from 3.8% in June, but higher than expectations of 3.5%. Investors will take more cues from the Australian Retail Sales, which are due on Friday.
The US Federal Reserve (Fed) signaled that lower interest rates are finally on the horizon, which weighs on the USD broadly. Fed Chair Jerome Powell said at Jackson Hole last week that “the time has come for policy to adjust.” However, the weakness in the job market is also playing a role in nudging the Fed to ease borrowing costs. The US Nonfarm Payrolls for August next week will be closely watched. Later on Thursday, traders will focus on the US GDP growth numbers for the second quarter in the second estimate, which is forecast to expand by 2.8%.
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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