- AUD/USD gives up most intraday gains as US Dollar remains on the defensive.
- The US dollar weakened when Trump nominated veteran hedge fund manager Bessent as Treasury Secretary.
- Investors await monthly inflation data from Australia for further guidance on interest rates from the RBA.
The AUD/USD pair gives up most of its intraday gains after facing selling pressure near the intraday high of 0.6550 in the North American session on Monday. The Australian pair falls even as the US Dollar (USD) teeters near the intraday low, suggesting that the Australian Dollar (AUD) is also performing weakly.
The US Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, corrects near 106.80 after recording a new two-year high of 108.00 on Friday.
The dollar got off to a negative start at the open on Monday when President-elect Donald Trump tapped hedge fund manager Scott Bessent as Treasury Secretary. The market reaction to the news appeared positive for risk assets while the US dollar and bond yields were severely affected.
However, MUFG analysts commented that Monday’s dollar depreciation is a temporary correction after Friday’s strong gains. Bessent has indicated “a possible more balanced approach” towards trade tariffs. However, this will not change the prospects of the United States (US) economy performing much better than others.
This week, investors will focus on US personal consumption expenditure (PCE) price index data for October for further guidance on interest rates, due out on Wednesday. Investors will pay close attention to the PCE core inflation data, a preferred inflation indicator of the Federal Reserve (Fed), which is estimated to have grown 2.8%, faster than the 2.7% in September.
Meanwhile, the Australian Dollar (AUD) will be guided by monthly Consumer Price Index (CPI) data for October, due to be released on Wednesday. Economists estimate that inflation data has risen at a faster pace of 2.3% from 2.1% in September. Inflation data will significantly influence market expectations for the Reserve Bank of Australia’s (RBA) interest rate path. The RBA is currently expected to keep its Official Cash Rate (OCR) unchanged at 4.35% by the end of the year.
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.
