- AUD/USD is trading lower near 0.6735 during the European session on Friday, down 0.10% on the day.
- RBA’s hawkish comments fail to boost Aussie sentiment amid cautious sentiment.
- The US NFP report for August will be the highlight of Friday.
The AUD/USD pair is trading lower around 0.6735, snapping the two-day losing streak during the European session on Friday. Markets are turning cautious ahead of Friday’s US jobs reports.
The Australian Dollar (AUD) is weakening on the day despite a weaker greenback and hawkish comments from Reserve Bank of Australia (RBA) Governor Michele Bullock. The RBA’s Bullock said on Thursday: “If the economy evolves broadly as anticipated, the board does not expect to be in a position to cut rates in the near term.”
On the other hand, investors see the US Federal Reserve (Fed) starting to ease monetary policy at its next meeting in September. The CME FedWatch tool showed that markets now price in a nearly 59% chance of a 25 basis point (bps) Fed rate cut in September, while the chance of a 50 bps rate cut stands at 41%.
Disappointing ADP Employment Change data on Thursday weighed on the USD against the AUD. Automatic Data Processing (ADP) revealed on Thursday that private sector employment rose by 99,000 in August, following the increase of 111,000 (revised from 122,000) reported in July and well below the consensus of 145,000.
Investors will be keeping a close eye on US employment data on Friday as it could offer some clues about the size and pace of the Fed’s rate easing cycle. Investors are looking for the NFP to rise by 160,000 in August, following the 114,000 increase seen in July. The unemployment rate is projected to fall to 4.2% in August. Weaker readings could trigger a 50 bps rate cut by the Fed, putting some selling pressure on the US 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.
