AUD/USD remains subdued near 0.6350 as focus shifts to Fed policy outlook
- AUD/USD struggles around 0.6350 as the US Dollar gains further.
- Fed’s policy-easing cycle is expected to stall in January.
- The Australian Dollar is also performing strongly as traders pare RBA dovish bets.
The AUD/USD pair exhibits a subdued performance in Friday’s European session. The Aussie pair stays under pressure as the US Dollar (USD) performs strongly on expectations that the Federal Reserve (Fed) will shift its policy stance from “dovish” to “slightly hawkish” after cutting interest rates in the policy meeting on Wednesday.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, gains for the sixth trading day in a row on Friday and climbs above 107.00.
Traders fully price in the Fed to reduce its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% on Wednesday and are confident about leaving them unchanged in the January meeting, according to the CME FedWatch tool.
“The recent slowdown in the pace of US disinflation, a lower Unemployment Rate than what the Fed projected in September, and exuberance in US financial markets are contributing to this more hawkish stance,” analysts at Macquire said.
Meanwhile, the Australian Dollar (AUD) is also performing strongly against a majority of its peers as upbeat Australian employment data for November has forced traders to pare bets that the Reserve Bank of Australia (RBA) will start reducing interest rates from the February meeting.
The Australian economy added 35.6K workers, higher than estimates of 25K and the former release of 12.1K. The Unemployment Rate surprisingly fell to 3.9% from 4.1% in October, which was expected to accelerate to 4.2%.
Apart from domestic strength in the AUD, People’s Bank of China’s (PBoC) resolute to prevent the risk of exchange rate overshooting has also offered some support. China’s lower exchange rate would make their exports competitive in global markets, a scenario that is favorable for the Australian Dollar being a leading trading partner of China.
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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