AUD/USD hits lows below 0.6450 with the China-Japan tensions weighing
- The Aussie Dollar dips below 0.6450 against the USD on growing geopolitical frictions¡.
- Comments of Japanese Takaichi hinting at a response to an attack on Taiwan have raised tensions with China.
- The US Dollar remains soft as hopes of immediate Fed cuts grow.
The Australian Dollar is failing to draw any significant support from the positive market sentiment on Monday. The pair retreated to session lows at 0.644 during the European Morning trading session, down from the 0.6465 highs seen in Asia, leaving price action close to the three-month lows at 0.6429 hit on Friday.
The Aussie Dollar is among the worst performers on Monday amid escalating tensions between Japan and China, Australia's largest trading partners. China’s Foreign Minister Wang Yi affirmed earlier on Monday that Japanese PM Takaichi “crossed a red line” when she suggested that a Chinese action against Taiwan would trigger a military response from Japan.
The rising tensions in an already volatile area have offset the impact of the positive Australian data seen last week. Preliminary PMI data revealed that Australian manufacturing activity returned to growth levels in November, after October’s contraction, and that services activity accelerated for the second consecutive month, which reaffirms the RBA’s hawkish stance.
In the US, the positive USD impact of the S&P Global PMIs and the improvement in the Michigan Consumer Sentiment Index were offset by dovish comments from Fed’s Williams, who hinted at further interest rate cuts in the coming months.
Williams, the President of the New York Fed and vice chair of the Federal Open Market Committee (FOMC), affirmed on Friday that the central bank has leeway to lower interest rates without risking its inflation target. Chances of a 25 basis points cut in December jumped to 75% from around 45% earlier in the week, according to the CME Group's Fed Watch Tool, which sent the US Dollar retreating against its main peers.
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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