untitled design

AUD/USD remains below 0.6750 as US Dollar recovers

  • AUD/USD is trading lower around 0.6745 during the Asian session on Monday.
  • US NFP rose 206,000 in June from 218,000 previously, better than estimates.
  • AUD strength remains amid stronger Australian economic data.

The AUD/USD pair is down to 0.6745, snapping the four-day winning streak during Monday’s Asian session. Renewed demand for the US Dollar (USD) amid a cautious mood is weighing on the pair. In the absence of high-level data releases from Australia and the US on Monday, the USD price dynamics will be the main driver for the AUD/USD pair.

US job growth slowed in May, according to the US Bureau of Labor Statistics (BLS) on Friday. US Nonfarm Payrolls (NFP) rose 206,000 in June, following the increase of 218,000 (revised from 272,000) recorded in May. This figure exceeded the market expectation of 190,000.

Meanwhile, the unemployment rate rose to 4.1% in June from 4% in May. Wage inflation, as measured by the change in Average Hourly Earnings, fell to 3.9% year-on-year in June from 4.1% in the previous reading, in line with market expectations.

The recent jobs data has increased the likelihood of rate cuts by the US Federal Reserve (Fed) in September, with markets pricing in a 77% probability, up from 70% before the report. The expectation of a Fed rate cut will likely put some selling pressure on the Dollar in the near term and could limit the pair’s downside.

On the Australian front, elevated inflation in Australia coupled with stronger retail sales and services PMI led the Reserve Bank of Australia (RBA) to maintain a hawkish stance. This, in turn, could continue to support the Australian Dollar (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 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 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

You may also like

Get the latest

Stay Informed: Get the Latest Updates and Insights


Most popular