- AUD/USD gains ground to near 0.6220 in Monday’s early Asian session.
- Fed officials have become more cautious about cutting interest rates, which might support the USD.
- The RBA dovish expectation is likely to weigh on the Aussie.
The AUD/USD pair holds positive ground around 0.6220 during the early Asian session on Monday. However, the potential upside of the pair might be limited as markets continue to digest the US Federal Reserve’s (Fed) hawkish pivot. The market will likely be quiet heading into the last week of 2024.
The Fed cut its benchmark interest rate by a quarter point at the December meeting, and the latest Dot Plots indicated two rate cuts next year. Fed Chair Jerome Powell said earlier this month that Fed officials “are going to be cautious about further cuts” after an as-expected quarter-point rate reduction. The Fed’s hawkish message is likely to support the Greenback and act as a headwind for AUD/USD in the near term.
Furthermore, economists widely expect tax cuts, tariffs, and deregulation by the incoming administration of President-elect Donald Trump would stoke inflation and might convince the US central bank to scale back its expectations for the year ahead.
On the other hand, the Reserve Bank of Australia’s (RBA) dovish bets might drag the Aussie lower. The RBA’s December meeting minutes emphasised that policymakers have become confident that inflationary pressures are easing in line with expectations. Traders have priced in nearly a 65% chance of a 25 basis points (bps) rate cut at the February 18 meeting, with full expectations for a cut by April.
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.