- AUD/USD softens to around 0.6215 in Friday’s early Asian session.
- Fewer Fed rate cuts bets and Trump's policies continue to support the USD.
- RBA’s Meeting Minutes revealed the board had grown more confident about inflation, but risks persisted.
The AUD/USD pair remains on the defensive around 0.6215 during the early Asian session on Friday. The incoming Donald Trump administration is expected to boost growth and lift inflation, supporting the US Dollar (USD). The markets are likely to be quiet ahead of next week’s New Year holiday.
The US Federal Reserve (Fed) decided to cut the interest rates by 25 basis points (bps) last week as expected, and Fed Chair Jerome Powell said more rate cuts now hinge on further progress in lowering stubbornly high inflation. Additionally, analysts expect that the potential new Trump tariff policies on trading partners could increase price pressures and slow the pace of rate reductions by the US central bank, which underpins the Greenback against the Australian Dollar (AUD).
Data released by the US Department of Labor (DOL) on Thursday showed that the US Initial Jobless Claims declined to 219K in the week ending December 21. This reading followed the previous week's print of 220K and came in below the market consensus of 224K.
On the Aussie front, the latest minutes of the Reserve Bank of Australia (RBA)’s monetary policy suggested the Australian central bank is more confident that inflation is moving sustainably toward the target. Nonetheless, it’s premature to conclude the battle is won due to a recent pick-up in household spending and a tight labor market. Analysts expect the RBA to start cutting rates only by the second quarter of 2025 in a shallow easing cycle.
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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