- AUD/USD falls below 0.6700 as the US Dollar performs strongly.
- The Fed is expected to cut interest rates gradually in the remainder of the year.
- Investors await the Aussie Employment data for September.
The AUD/USD pair extends its downside below the key support of 0.6700 in Wednesday’s European session. The Aussie asset weakens as the market sentiment remains risk-averse on expectations that US former President Donald Trump could win upcoming presidential elections. Trump’s victory could have a negative impact on risk-sensitive currencies as he favors a closed economy culture.
S&P 500 futures exhibit a subdued performance in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises further to near 103.40.
The Greenback posts a fresh two-month high as market participants expect that the Federal Reserve’s (Fed) policy-easing cycle will be gradual in the remainder year. According to the CME FedWatch tool, the Fed will cut interest rates by 50 basis points (bps) to 4.25%-4.50% by the year-end, suggesting that there will be two quarter-to-a-basis rate cuts, which will come in November and December.
Going forward, the next trigger for the US Dollar will be the monthly Retail Sales data for September, which will be published on Thursday. The Retail Sales data, a key measure of consumer spending, is expected to rise by 0.3%.
On the Aussie front, investors await the Employment data for September, which will be published on Thursday. The labor market data is expected to show that the Australian economy 25K new workers, lower than 47.5K in August. The Unemployment Rate is expected to remain steady at 4.2%. Sings of steady or stronger job growth would allow the Reserve Bank of Australia (RBA) to keep its Official Cash Rate (OCR) steady at 4.35%.
(This story was corrected on October 16 at 12:13 GMT to say that US Retail Sales data is expected to rise by 0.3%, not rose by 0.3%.)
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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