- AUD/USD attracts some intraday sellers on reports that China will cut mortgage rates this month.
- The lower chances of a major rate cut by the Fed support the USD and contribute further to the decline.
- Expectations for the start of the Fed easing cycle, market optimism limits the USD and provides support.
The AUD/USD pair retreats around 40 pips from the proximity of the 0.6700 level, or a fresh weekly high set earlier this Thursday, and drops to a daily low during the first half of the European session. Spot prices, for now, seem to have halted the recovery from a four-week low touched on Wednesday and are currently trading around the 0.6670-0.6665 region, almost unchanged on the day.
Reports that China will cut interest rates on $5 trillion worth of mortgages as soon as this month to try to boost consumer activity have reignited concerns about a slowdown in the world’s second-largest economy. This, in turn, is weighing on antipodean currencies, including the Australian Dollar (AUD), which, along with a modest US Dollar (USD) strength, are proving to be key factors behind the sharp intraday decline.
The crucial US Consumer Price Index (CPI) report released on Wednesday indicated that consumer prices in the US are declining overall. That said, the core CPI suggests that underlying inflation remains persistent and dashed hopes for a larger rate cut by the Federal Reserve (Fed) next week. This leads to a spike in US Treasury bond yields and lifts the US Dollar back near the monthly high.
Investors, however, seem convinced that the US central bank will begin its policy easing cycle and cut borrowing costs by 25 basis points at each of the three remaining policy meetings in 2024. This, coupled with market optimism, limits any further gains for the safe-haven dollar and offers some support to the risk-sensitive AUD. Traders now look to the US Producer Price Index (PPI) for fresh impetus.
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, 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 compared to 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.
