- AUD/USD is trading weaker near 0.6790 in early Asian session on Monday.
- Fed’s Powell says ‘time has come’ to cut interest rates.
- RBA’s hawkish comments could limit AUD’s downside in the near term.
The AUD/USD pair is trading on a weaker note around 0.6790 during the early Asian session on Monday. However, the US Dollar (USD) is likely to remain under pressure following US Federal Reserve Chairman Jerome Powell’s dovish speech at Jackson Hole. US Durable Goods Orders for July will be released later on Monday.
Fed Chair Powell spoke at the Kansas City Fed’s annual economic symposium in Jackson Hole on Friday, saying, “The time has come to tighten policy.” Powell did not mention when the rate cuts would begin or how large they might be, but markets expect the Fed to announce a quarter-point cut at the September meeting. The FOMC minutes from last week’s July meeting showed that a “large majority” of Fed officials believe a cut in September will be appropriate as long as there are no surprises in the data.
Following Powell’s speech, Philadelphia Fed President Patrick Harker said that the US central bank needs to lower rates in a methodical manner. Meanwhile, Chicago Fed President Austan Goolsbee said that monetary policy is currently at its most restrictive level, and the Fed’s focus is now shifting to fulfilling its employment mandate. The expectation of a Fed rate cut will likely put some selling pressure on the USD and create a tailwind for AUD/USD.
On the Australian front, minutes from the Reserve Bank of Australia (RBA) revealed that board members agreed that a rate cut is unlikely anytime soon. RBA Governor Michele Bullock noted that the central bank will not hesitate to raise rates again to combat inflation if necessary. The RBA’s hawkish comments could further boost the AUD against the Dollar.
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 data, 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 versus 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.
