- AUD/USD falls near 0.6220 as Trump threatens to impose tariffs on China.
- The RBA is expected to start cutting interest rates in February.
- The US dollar recovers sharply as Trump confirms that the tariff plan is still on track.
The AUD/USD pair falls sharply near 0.6220 in the North American session on Tuesday after a couple of failed attempts to return to the key resistance of 0.6300. The Australian pair falls as the President of the United States (US), Donald Trump, threatens to increase tariffs on China, a measure that would also harm the Australian export sector, being China’s main trading partner.
Trump’s presidential memo showed that he ordered federal agencies to evaluate trade relations with China and other North American economies.
Meanwhile, expectations are growing that the Reserve Bank of Australia (RBA) could shift to an easing policy at its February policy meeting. The RBA’s dovish bets rose after the board said at the December meeting it had gained some confidence that inflation was moving sustainably towards target.
The US Dollar (USD) rebounds sharply, recovering most of Monday’s losses as Trump confirms the tariff plan is still on track. The US Dollar Index (DXY), which measures the value of the greenback against six major currencies, rebounds from a nearly two-week low of 108.00.
AUD/USD finds buying interest after returning to a more than four-year low of 0.6170. However, the pair’s outlook remains bearish as the 50-week EMA near 0.6526 is tilted lower.
The 14-week Relative Strength Index (RSI) rebounds after becoming oversold near 30.00. However, the overall momentum will remain bearish as long as it remains within the 20.00-40.00 range.
Going forward, the pair will face further declines if it fails to hold the January 13 low of 0.6131. This will push it towards the round level support of 0.6100 and the April 2020 low of 0.5990.
On the other hand, a decisive break above the January 6 high of 0.6302 will open the doors to the December 18 high of 0.6340 and the round level resistance of 0.6400.
AUD/USD weekly 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.
