Australian Dollar declines following TD-MI Inflation Gauge data
- AUD/USD remains subdued as the Australian Dollar weakens following TD-MI Inflation Gauge data.
- Major Australian banks expect further RBA rate hikes, noting June minutes showed intense concern over persistent inflation.
- The US Dollar remains strong as financial markets continue to price in multiple Federal Reserve interest rate hikes this year.
AUD/USD declines after two days of gains, trading around 0.6930 during the Asian hours on Monday. The currency pair loses ground following the release of TD-MI Inflation Gauge data, which came in at -0.4% month-over-month, against the -0.3% prior.
Traders are weighing hawkish interpretations of the Reserve Bank of Australia’s (RBA) June Meeting Minutes released last week. Major Australian banks noted that the RBA remains highly concerned about sticky inflation. The Commonwealth Bank of Australia pointed out that the minutes highlighted persistent excess demand and capacity constraints, while ANZ echoed this view, warning that the minutes reinforce the distinct risk of another RBA rate hike ahead.
The US Dollar (USD) holds its ground, buoyed by market expectations of multiple Federal Reserve (Fed) rate hikes later this year. This comes despite easing global inflation concerns, which have been helped by oil flows normalizing through the critical Strait of Hormuz.
The CME FedWatch tool shows financial markets are pricing in a 77.3% chance of interest rate hikes by year-end. Investors are now looking ahead to Wednesday's release of the Fed’s June policy Meeting Minutes to gain clearer insights into the future path of interest rates.
However, recent US labor data have forced Wall Street to aggressively rethink this hawkish outlook. The latest Nonfarm Payrolls (NFP) report revealed the US economy added a mere 57,000 jobs last month, severely missing the market's forecast of 110,000. While the headline unemployment rate did manage an unexpected drop to 4.2% from May's 4.3%, the dramatic hiring slowdown strongly signals that the broader economy is cooling down.
Amid this shifting backdrop, Fed Chair Kevin Warsh firmly reaffirmed the central bank’s independent commitment to its 2% price stability target. Notably, he also acknowledged that inflation risks and expectations have finally begun to moderate over the past month.
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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