AUD/USD trades stronger above 0.6650 on positive risk sentiment, hawkish RBA
- AUD/USD trades on a stronger note near 0.6670 in Monday’s early Asian session.
- US University of Michigan sentiment rose for the first time since March.
- The RBA’s hawkish stance boosts the Aussie against the USD.
The AUD/USD pair kicks off the new week on a positive note around 0.6670. A risk-on tone across markets and rising expectations of an imminent rate cut by the Federal Reserve (Fed) drag the US Dollar (USD) lower and provide some support to the pair. The minutes of the Reserve Bank of Australia (RBA) Board’s August meeting and the Fed’s Chair Jerome Powell's speech will be in the spotlight this week.
Consumer Sentiment in the United States rose for the first time in five months. The preliminary University of Michigan Consumer Sentiment Index improved to 67.8 in August versus 66.4 prior, better than the market expectation of 66.9. Meanwhile, US housing data declined sharply in July. Housing Starts fell 6.8% in July to 1.238 million units from the 1.1% increase in June, while the Building Permits decreased 4.0% in July after rising 3.9% in June.
Markets are overconfident that the Fed will rush to cut the interest rate, but it depends on incoming data. According to the CME FedWatch Tool, traders have priced in nearly 76% odds of a 25 basis points (bps) Fed rate cut in its September meeting. A week ago, markets had priced in over 50% possibility that the Fed would implement a deeper cut and reduce by 50 bps. The Fed Chair Powell's speech at the Jackson Hole symposium on Friday could offer some hints about guidance on the pace of Fed easing. The dovish comments from the officials could exert some selling pressure on the Greenback.
On the other hand, the hawkish stance of the Australian central bank continues to underpin the Australian Dollar (AUD). RBA Governor Michele Bullock noted that the central bank remains focused on the potential upside risks to inflation and does not consider any rate cuts in the near term. "Based on what the Board knows at present, it does not expect that it will be in a position to cut rates in the near term," Bullock said.
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.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
