- AUD/USD rebounds as US Dollar falls after a brief pullback following weekly US jobless claims data.
- The US dollar’s upside remains limited by optimism over the Fed’s interest rate cuts in September.
- Australia’s Composite PMI returns to expansion in August.
The AUD/USD pair is finding buying interest from the intraday low of 0.6725 in Thursday’s New York session. The Australian asset is expected to resume its bullish trajectory as the US Dollar (USD) retreats following the release of the US Initial Jobless Claims report for the week ending August 16.
The report showed that the number of people filing for unemployment benefits for the first time was higher at 232,000 versus estimates of 230,000 and the previous release of 228,000, revised up from 227,000, raising concerns about deteriorating labor market conditions. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, fell after a brief reversal move near 101.40.
The short-term appeal of the US Dollar is already vulnerable as the Federal Reserve (Fed) appears to be on track to begin cutting interest rates in September. The latest Federal Open Market Committee (FOMC) minutes showed that the ‘vast majority’ of officials view rate cuts in September as appropriate, given that price pressures continue to ease as expected.
Meanwhile, investors are awaiting Fed Chair Jerome Powell’s speech at the Jackson Hole (JH) symposium on Friday. Investors will be looking for clues on the likely size of rate cuts in September and how much they will be reduced by the end of the year.
In the Asia-Pacific region, the Australian Dollar (AUD) has outperformed the US Dollar over the past three weeks amid firm speculation that the Reserve Bank of Australia (RBA) will not cut interest rates this year. The RBA is expected to keep its Official Cash Rate (OCR) at its current level for an extended period as officials remain vigilant about upside risks to inflation.
In terms of economic data, Australia’s Judo Bank’s preliminary PMI report showed that overall business activity expanded to 51.4 after contracting to 49.9 in July, driven by a sharp rise in the services sector. While activities in the manufacturing sector contracted at a slower pace.
Australian Dollar FAQs
One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Since Australia is a resource-rich country, another key factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and the Trade Balance. Market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or seeking safe havens (risk-off), is also a factor, with risk-on being positive for the 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 RBA’s main objective 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 ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter positive for the AUD.
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian Dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite occurs when the Chinese economy is not growing as fast as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, worth $118 billion per year as of 2021 data, with China being its main destination. The price of iron ore can therefore be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD rises as well, as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to lead to a higher probability of a positive trade balance for Australia, which is also positive for the AUD.
The trade balance, which is the difference between what a country earns from its exports and 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, its currency will gain value solely because of the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on buying imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
