- AUD/USD weakens near 0.6770 in Monday’s early Asian session.
- US PPI climbed more than expected in June on a margin pickup at service providers.
- The RBA’s hawkish stance might support the Aussie in the near term.
The AUD/USD pair trades on a weaker note around 0.6770, snapping the four-day winning streak during the early Asian session on Monday. The recovery of the US Dollar (USD) provides some support to the pair. Later on Monday, the Chinese economic data and US NY Empire State Manufacturing Index for July are due and the Federal Reserve’s (Fed) Mary Daly is set to speak.
The hotter-than-expected US Producer Price Index (PPI) figures on Friday had little to no impact on the USD. The PPI for final demand rose 0.2% MoM in June, according to Bureau of Labor Statistics data. On an annual basis, the PPI rose 2.6% YoY in June, compared to the previous reading of 2.4%. Additionally, the preliminary Michigan Consumer Sentiment Index came in below expectation at 66.0, compared to the forecast 68.5 and the previous 68.2.
The rising bets on the Federal Reserve’s (Fed) rate cut in September after the release of softer US inflation figures might continue to limit the Greenback’s upside and create a tailwind for AUD/USD. According to the CME Fedwatch Tool, traders have priced in nearly 80% odds for a 25 basis points (bps) cut in September.
On the Aussie front, UBS FX strategists said, “Following the stronger-than-expected inflation data for May, we think a robust labor report and higher quarterly CPI for the second quarter will likely lead to a rate hike by the Reserve Bank of Australia (RBA) in August. This underpins our recommendation to sell the downside price risks of AUD/USD.”
Traders will take more cues from China’s Gross Domestic Product (GDP) for the second quarter, Industrial Production, and Retail Sales for June for fresh impetus. The weaker reading might drag the Aussie lower as China is one of Australia’s closest trade partners,
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.