- AUD/USD rises to monthly high around 0.6300 as Trump threatens lower tariffs on China than feared.
- DXY Dollar Index rebounds after refreshing a two-week low near 107.75.
- Investors Await Preliminary US S&P Global PMI Data for January
The AUD/USD pair revisits the monthly high around 0.6300 in the North American session on Wednesday. The Australian pair rises as the Australian Dollar (AUD) gains ground on reports that United States (US) President Donald Trump is threatening to increase tariffs on China to 10% starting February 1.
The number of tariff increases proposed by Trump is significantly smaller than market participants had anticipated. On the campaign trail, Trump said he would impose 60% tariffs on China if he won the election. Any economic development in China significantly impacts the Australian Dollar, given that Australia is China’s largest trading partner.
Meanwhile, the US Dollar (USD) recovers its intraday losses after posting a new two-year high, with the US Dollar Index (DXY) bouncing from 107.75.
Looking ahead, investors will focus on preliminary US S&P Global Purchasing Managers’ Index (PMI) data for January, due out on Friday.
AUD/USD rebounds from a more than four-year low of 0.6170. The pair bounced after a divergence in momentum and price action. The 14-period Relative Strength Index (RSI) formed a higher low, while the pair made lower lows on a four-hour time frame.
The asset has recovered near the 200-period exponential moving average (EMA) near 0.6300. The 20-day EMA is tilting upwards near 0.6247, suggesting that the short-term trend has turned bullish.
Looking ahead, a sustained move above 0.6300 will open the doors to the December 18 high of 0.6340 and the round level resistance of 0.6400.
On the other hand, the pair would face further declines if it fails to hold the January 13 low of 0.6131. This will push it down towards the round level support of 0.6100 and the April 2020 low of 0.5990.
AUD/USD four-hour chart
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.
