- AUD/USD is trading with slight gains around 0.6705 in early Asian session on Monday.
- The two-day FOMC meeting ends on Wednesday with an expected rate cut.
- China’s retail sales and industrial production were worse than expected.
The AUD/USD pair is posting modest gains near 0.6705 during the early Asian session on Monday. The pair’s rally is supported by the weakness of the US Dollar (USD). However, concerns over the economic slowdown in China could limit the upside of the Australian Dollar (AUD), which acts as a proxy for China. All eyes will be on the US Federal Reserve (Fed) interest rate decision on Wednesday.
Markets are largely divided on whether the US Fed will cut rates by 25 basis points (bps) to a range of 5.0% to 5.25% or by 50 bps at its next policy meeting. According to the CME’s FedWatch tool, markets have priced in a nearly 49% chance of a larger rate cut by the Fed, a significant jump from a 28% probability a day earlier. Investors will take further cues from the FOMC press conference on the US interest rate outlook. If Powell signals more aggressive easing, this could put some selling pressure on the Dollar and create a tailwind for AUD/USD.
On the other hand, disappointing Chinese economic data released over the weekend could weigh on the Australian dollar as China is Australia’s largest trading partner. Data released by the National Bureau of Statistics (NBS) on Saturday showed that Chinese retail sales rose 2.1% year-on-year in August from 2.7% in July, while industrial production rose 4.5% year-on-year in the same period from 5.1% previously. Both figures were below the market consensus.
Australian employment data is due for release on Thursday. Reserve Bank of Australia (RBA) Deputy Governor (Economics) Sarah Hunter said last week that “the labour market remains tight relative to full employment” and the RBA’s stance is that “further declines in vacancies may still occur alongside a relatively modest rise in the unemployment rate.” The comments support the RBA’s stance against near-term rate cuts, which could lift the AUD against the USD.
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.
