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- AUD/USD attracts some buyers near 0.6550 amid RBA’s hawkish stance, bigger Fed rate cut bets
AUD/USD attracts some buyers near 0.6550 amid RBA’s hawkish stance, bigger Fed rate cut bets
- AUD/USD trades in positive territory around 0.6545 in Wednesday’s early European session, gaining 0.38% on the day.
- The RBA delivered hawkish interest rate guidance, lifting the Aussie.
- Market players have raised their bets on Fed rate cuts by 50 bps in September.
The AUD/USD pair extends the recovery near 0.6545 on Wednesday during the early European trading hours. The hawkish stance from the Reserve Bank of Australia (RBA) supports the Australian Dollar (AUD) against the Greenback. Investors will take more cues from RBA Governor Michele Bullock's speech on Thursday.
The RBA left interest rates on hold at 4.35% for the sixth consecutive meeting at its August policy meeting on Tuesday. RBA’s Bullock emphasized that inflation will remain a problem for some time yet before inflation is sustainably in the target range. Bullock further stated that the Australian central bank might need to maintain interest rates higher for an extended period. The RBA’s hawkish guidance on interest rates might boost the Aussie in the near term.
Elsewhere, the National Bureau of Statistics of China will publish the country’s Consumer Price Index (CPI) and Producer Price Index (PPI) for July. The CPI inflation is expected to rise to 0.3% in July from 0.2% in June, while the PPI is estimated to fall to 0.9% in the same report period. The worse-than-expected readings could raise the fear of an economic slowdown in China and weigh on the Aussie as China is Australia's largest trading partner.
On the USD’s front, traders are now raising bets on a deeper rate cut by the Federal Reserve (Fed). According to the CME FedWatch Tool, the markets are now pricing in nearly 85% odds that the Fed will cut the rate by 50 basis points (bps) in September, up from only 11.5% last week. JPMorgan chief economist Michael Feroli noted that there is a "strong case to act before the next scheduled policy meeting on September 17-18. The rising speculation of Fed rate cuts might undermine the US Dollar and create a tailwind for AUD/USD.
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.
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