The AUD/USD pair trades with mild gains near 0.7090 during the early Asian session on Monday. The US Dollar (USD) weakens against the Australian Dollar (AUD) as Federal Reserve (Fed) rate hike odds fade amid weaker US economic data. Traders brace for China’s Retail Sales and Industrial Production reports, which are due later on Monday.
Data released by the US Census Bureau on Friday showed that US Retail Sales declined 0.6% MoM in July, compared to a rise of 0.2% in June. This figure came in below market expectations of 1 0.1% growth. On a yearly basis, Retail Sales arrived at 5.0% in July versus 6.8% (revised from 6.7%).
This report has dampened market expectations for a September Fed rate hike. The odds of a September increase dropped from around 50% to 33.1% this week, according to the CME FedWatch tool.
Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent said last week that it would take “some time for tighter monetary policy to have its full effect on economic activity and inflation,” but that the early evidence points to the policy working as designed.
Reuters reported on Sunday that Israel has resumed airstrikes against Lebanon in the past few days after scaling back its attacks in the enclave earlier this month. Traders will closely monitor the developments surrounding Middle East conflicts. Any signs of rising tensions in the Middle East could boost a safe-haven currency such as the Greenback and create a headwind for the pair in the near term.
RBA stance stays hawkish as Bullock signals readiness to act
Analysts at Societe Generale highlight that the Reserve Bank of Australia’s latest communication maintained a distinctly firm tone, noting that “the statement was hawkish and Governor Bullock declared the bank would not hesitate to act if needed.” In their view, this reinforces the message that policymakers remain alert to inflation risks and are prepared to tighten policy further should price pressures fail to moderate as expected.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for 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 main goal of the RBA 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. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus 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, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
