- AUD/USD is trading with slight gains around 0.6715 in early Asian session on Wednesday.
- Australia’s services PMI rose to 52.5 in August from 52.2 previously, better than estimated.
- Traders raised bets on a more aggressive rate cut following weak US manufacturing PMI data.
The AUD/USD pair is gaining traction near 0.6715 during the early Asian session on Wednesday. Australia’s upbeat August Purchasing Managers’ Index (PMI) is providing some support to the Australian Dollar (AUD). However, traders will take further cues from Australia’s Gross Domestic Product (GDP) for the second quarter, which is due out on Wednesday.
Data released by Judo Bank and S&P Global on Wednesday showed that the country’s services PMI was stronger than expected, rising to 52.5 in August from 52.2 in July. Meanwhile, the composite PMI improved to 51.7 in August, better than the estimate and the previous reading of 51.4.
Investors will be closely watching Australia’s GDP growth figure, which is expected to grow by 0.3% quarter-on-quarter in the second quarter (Q2) of the year and by 1% in the twelve months to June. A stronger-than-estimated GDP could boost the Australian Dollar, while a weaker reading could trigger speculation that the Reserve Bank of Australia (RBA) will cut interest rates and could weigh on the AUD.
The US ISM manufacturing PMI recorded the lowest reading since November. The figure rose to 47.2 in August from 46.8 in July, but below the market consensus of 47.5. The weaker reading increased the likelihood that the Federal Reserve (Fed) will cut interest rates by at least a quarter of a percentage point later this month.
Traders raised the likelihood of a more aggressive half-point cut to 39%, up from 31% ahead of the U.S. ISM manufacturing PMI report, according to the CME Group’s FedWatch measure. The U.S. ISM services PMI is due out on Thursday, and is projected to decline to 51.4 in August from 51.1 in July. On Friday, the focus will be on the U.S. Nonfarm Payrolls (NFP) report for August.
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.
