AUD/USD trades near its 16-month high of 0.6940, set in the previous session.
The Australian Dollar gains support as three-year bond yields hit 4.27%, the highest since November 2023.
The US Dollar weakens amid rising political uncertainty and risks of a partial government shutdown.
AUD/USD holds near its 16-month high of 0.6940, reached in the previous session, currently trading around 0.6920 during the Asian hours on Tuesday. Traders now await the December Consumer Price Index (CPI) data due Wednesday for further clues on the Reserve Bank of Australia’s (RBA) policy outlook.
The Australian Dollar (AUD) draws support against the US Dollar (USD) as government bond yields have grown more attractive, with policy-sensitive three-year bond yield rising to 4.27%, the highest level since November 2023, supported by confidence in Australia’s top-tier credit rating and the central bank’s hawkish policy outlook.
Australia’s strong PMI data reinforced the likelihood of a tighter monetary policy from the Reserve Bank of Australia (RBA), supported by employment data. RBA policymakers acknowledged that inflation has eased significantly from its 2022 peak, though recent data suggests renewed upward momentum. Headline CPI slowed to 3.4% YoY in November but remains above the RBA’s 2–3% target band.
The AUD/USD pair could recover ground as the US Dollar (USD) comes under pressure from rising political uncertainty, with the US government heading toward a potential partial shutdown. Senate Democratic leader Chuck Schumer has vowed to oppose a funding package that includes appropriations for the Department of Homeland Security, leaving Congress facing a January 30 deadline to avert a shutdown.
Traders may also turn cautious amid uncertainty surrounding the Federal Reserve (Fed). US President Donald Trump said last week he would soon announce his nominee to replace Fed Chair Jerome Powell, fueling speculation that the next chair could favor faster interest rate cuts. Focus now shifts to Wednesday’s Fed policy announcement.
What key factors drive the Australian Dollar?
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.
How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?
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.
How does the health of the Chinese Economy impact the Australian Dollar?
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.
How does the price of Iron Ore impact the Australian Dollar?
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.
How does the Trade Balance impact the Australian Dollar?
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.
The above content was completed with the assistance of AI and has been reviewed by an editor.
