- AUD/USD attracts some sellers on Monday amid a good pick-up in USD demand.
- Expectations of slower Fed rate cuts push US bond yields higher and lend support to the USD.
- Concerns over the US-China trade war further contribute to shifting monetary flows away from the Australian dollar.
The AUD/USD pair starts a new week/month on a weaker note and retreats below the psychological level of 0.6500 during the Asian session, snapping a three-day winning streak. Furthermore, the fundamental background supports prospects for a resumption of the recent downtrend seen over the past two months or so.
Concerns about the second wave of the US-China trade war after US President-elect Donald Trump takes office in January drive some safe-haven flows into the US Dollar (USD) and weaken the Australian Dollar (AUD), which acts as a proxy for China. In fact, Trump has promised large tariffs against the United States’ three largest trading partners: Mexico, Canada and China. Additionally, Trump threatened a 100% tariff on the so-called ‘BRICS’ nations – Brazil, Russia, India, China and South Africa – if they replace the USD with another currency for international transactions.
Meanwhile, growing market conviction that Trump’s tariff plans could raise consumer prices and restrain the Federal Reserve (Fed) from further easing monetary policy triggers a fresh rally in Treasury yields. Apart from this, lingering geopolitical risks arising from the protracted war between Russia and Ukraine help the safe-haven USD recover from a near three-week low hit on Friday. This overshadows the Reserve Bank of Australia’s (RBA) hawkish stance and barely supports the Australian Dollar.
Data released over the weekend showed that China’s official manufacturing Purchasing Managers’ Index (PMI) rose to 50.3 in November from 50.2, while the SNB non-manufacturing PMI fell to 50.0 during the reported month from 50.2 in October. Additionally, China’s Caixin Manufacturing PMI jumped to 51.5 in November from 50.3. Additionally, investors remain hopeful that the government will introduce more stimulus to boost domestic demand. This, however, fails to impress the bulls or provide any respite to the AUD/USD pair.
The aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the downside, although traders could refrain from opening aggressive bets ahead of key US macroeconomic data scheduled for the start of a new week. This week’s busy US economic schedule begins with the release of the ISM Manufacturing PMI, which could influence the USD and allow traders to take advantage of short-term opportunities. However, attention remains focused on US employment data, or Friday’s non-farm payrolls (NFP) report.
The 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). As 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 Balance of Trade. Market sentiment, that is, whether investors bet on riskier assets (risk-on) or seek safe havens (risk-off), is also a factor, with the 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 being 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 does not grow as fast as expected. Therefore, positive or negative surprises in Chinese growth data usually have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, with $118 billion a year according to 2021 data, with China being its main destination. The iron ore price, therefore, may be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD also rises as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to result in a higher likelihood 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 from the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on purchasing 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.
