- AUD/USD softens to around 0.6260 in Thursday’s early European session, down 0.44% on the day.
- The RBA is expected to deliver a rate cut to 4.1%
- The US January labor market report on Friday will be closely watched.
The AUD/USD pair weakens to near 0.6260 on Thursday during the European trading hours, pressured by rising fears over US-China trade war tensions and lower-than-expected Australian Trade Balance data. On Friday, all eyes will be on the US January labor market report, including the Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings.
Data released by the Australian Bureau of Statistics on Thursday showed that Australia’s trade surplus decreased to 5,085M MoM in December from 6,792M (revised from 7,079) in November. This reading came in lower than the 7,000M expected. Meanwhile, Exports rose by 1.1% MoM in December versus 4.2% (revised from 4.8%) prior. Imports climbed by 5.9% MoM in December, compared to 1.4% (revised from 1.7%) recorded in November.
Furthermore, the rising expectation that the Reserve Bank of Australia (RBA) will cut its interest rates for the first time since November 2020 contributes to the AUD’s downside. Money markets are now pricing in nearly a 95% chance of a rate cut from the current 4.35% to 4.10%.
Additionally, US President Donald Trump opens the door to significantly higher tariffs on other trade partners, such as the Eurozone and China. This, in turn, exerts some selling pressure on the China-proxy Australian Dollar (AUD) as China is a major trading partner to Australia.
The strength of the US Dollar is likely to persist over the coming quarters due to the hawkish stance of the US Federal Reserve (Fed). However, the US economic data released on Friday will be the highlight. Any signs of weaker labor marker conditions could drag the USD lower and help limit the pair’s losses.
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.