- AUD/USD edges lower to near 0.6735 in Friday’s European session, down 0.10% on the day.
- RBA’s hawkish remarks fail to boost the Aussie amid the cautious sentiment.
- The US NFP report for August will be the highlight on Friday.
The AUD/USD pair trades on a softer note around 0.6735, snapping the two-day losing streak during the European session on Friday. The markets turn cautious ahead of the US employment reports on Friday.
The Australian Dollar (AUD) weakens on the day despite the softer Greenback and the hawkish comments from Reserve Bank of Australia (RBA) Governor Michele Bullock. RBA’s Bullock said on Thursday, "If the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term.”
On the other hand, investors see the US Federal Reserve (Fed) start easing its monetary policy at its upcoming meeting in September. The CME FedWatch tool showed that the markets are now pricing in a nearly 59% chance of a 25 basis points (bps) Fed rate cut in September, while the possibility of a 50 bps rate cut stands at 41%.
The disappointing ADP Employment Change data on Thursday weighs on the USD against the AUD. Automatic Data Processing (ADP) revealed on Thursday that private sector employment increased by 99,000 in August, followed by the 111,000 (revised from 122,000) increase reported in July and below the consensus of 145,000 by a wide margin.
Investors will closely watch the US employment data on Friday as it might offer some cues about the size and pace of the Fed easing rate cycle. Investors estimate NFP to rise 160,000 in August following the 114,000 increase seen in July. The Unemployment Rate is projected to edge lower to 4.2% in August. The weaker readings might prompt a 50 bps rate cut by the Fed, which exerts some selling pressure on the US Dollar.
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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