- AUD/USD gains ground to around 0.6595 in the early stages of the Asian session on Monday, adding 0.54% on the day.
- The US NFP recorded the smallest increase since December 2020.
- The RBA is expected to keep the Official Cash Rate at 4.35% on Tuesday.
The AUD/USD pair gains momentum towards around 0.6595 during the early stages of the Asian session on Monday. The pair’s rally is driven by weakness in the US Dollar (USD) following weaker-than-expected US Non-Farm Payrolls (NFP) data for October. However, uncertainty around the US presidential election could boost safe-haven flows and weigh on riskier assets like the Australian Dollar (AUD).
Data released by the US Bureau of Labor Statistics (BLS) on Friday showed that NFPs in the US increased by 12,000 in October, following the increase of 223,000 (revised from 254,000) seen in September and falling short of the market estimate of 113,000 by a wide margin. Meanwhile, the unemployment rate stood at 4.1% in October, in line with consensus.
Financial markets have fully priced in a 25 basis point (bps) rate cut by the US Federal Reserve (Fed) at its November meeting on Thursday. Economists expect another quarter-point cut in December and possibly more similar moves next year. Investors will closely monitor the outcome of the US presidential election on Tuesday as it could trigger volatility in financial markets.
On the Australian front, the Reserve Bank of Australia (RBA) is expected to keep interest rates unchanged at a 13-year high amid a slow pace of disinflation and growing global uncertainties, highlighted by the upcoming presidential election. “Globally, there is more uncertainty than usual and, together with the domestic data, it argues for caution and patience from the RBA,” said Su-Lin Ong, chief economist at the Royal Bank of Canada.
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.
