AUD/USD remains depressed below 0.6200, lowest since October 2022 ahead of US NFP

AUD/USD struggles to register any meaningful recovery and hangs near multi-year trough.
The Fed’s hawkish shift keeps the US bond yields elevated and lends support to the USD.
US-China trade war fears and bets for an early RBA rate cut further weigh on the Aussie.
Bearish traders opt to move to the sidelines ahead of the release of the US NFP report.

The AUD/USD pair extends its sideways consolidative price move through the first half of the European session on Friday and remains close to its lowest level since October 2022 touched the previous day. Spot prices currently trade just below the 0.6200 mark and seem vulnerable to prolonging a well-established downtrend witnessed over the past three months or so amid a bullish US Dollar (USD).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, stands firm near a two-year peak in the wake of the Federal Reserve's (Fed) hawkish shift. In fact, the US central bank projected only two quarter-point rate cuts in 2025 amid still elevated inflation in the world's largest economy. Adding to this, the Minutes of the December FOMC meeting revealed that policymakers viewed labor market conditions as gradually easing and were in favor of slowing the pace of rate cuts on the back of stalling progress on inflation.

The outlook remains supportive of elevated US Treasury bond yields, which, along with geopolitical risks and concerns about US President-elect Donald Trump's tariff plans, drive some haven flows towards the buck. The Australian Dollar (AUD), on the other hand, is undermined by rising bets for an interest rate cut by the Reserve Bank of Australia (RBA) as early as next month, bolstered by a drop in Australia's core inflation. Apart from this, China's economic woes suggest that the path of least resistance for the Aussie is to the downside.

Traders, however, seem reluctant to place aggressive bets and opt to wait on the sidelines ahead of the release of the crucial US Nonfarm Payrolls (NFP) report later during the North American session. Furthermore, the Relative Strength Index (RSI) on the daily chart has moved on the verge of breaking into oversold territory and holding back bears from placing fresh bets around the AUD/USD pair. Nevertheless, the fundamental backdrop suggests that any attempted recovery might still be seen as a selling opportunity and remain capped.

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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