- AUD/USD plummets near 0.6620 as investors worry about China’s economic outlook.
- Strong speculation that the RBA will maintain a restrictive interest rate framework for longer fails to support the Australian Dollar.
- The risk-averse sentiment in the market enhances the US dollar’s safe-haven appeal.
The AUD/USD pair extends its losing streak for the seventh trading session on Tuesday. The Australian asset weakens near the round-level support of 0.6620 as the Australian Dollar (AUD) has been hit hard, being a liquid proxy for the Chinese Yuan.
China’s economy is going through a vulnerable phase due to weak demand from both domestic and overseas markets. The economy expanded at a slower pace of 0.7% in the second quarter versus estimates of 1.1% and the previous release of 1.5%.
Meanwhile, concerns over China’s economic outlook deepened after the People’s Bank of China (PBoC) surprised with a 10 basis point (bp) cut in both the short- and long-term Lending Prime Rates (LPR) on Monday.
China’s poor economic outlook has outweighed the strength of the Australian dollar, which was boosted by strong speculation that the Reserve Bank of Australia (RBA) will maintain its tight monetary policy for longer among the Group of Seven (G-7) economies. Investors are also hoping that the RBA may further increase its Official Cash Rate (OCR) due to persistent inflationary pressures and a stable labour market.
Looking ahead, investors will focus on Australia’s preliminary Judo Bank PMI data for July, due out on Wednesday.
Market sentiment remains risk-off amid political uncertainty in the United States (US). S&P 500 futures are posting a subdued performance in European trading hours. The Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is up at 104.40.
There are plenty of triggers for the US Dollar this week, which will test the adequacy of current market expectations for rate cuts in September.
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.
