AUD/USD rebounds ahead of RBA rate decision
- The Australian Dollar gained 1.26% as broad US Dollar weakness lifted the pair ahead of Tuesday's RBA meeting.
- The RBA is expected to raise its cash rate by 25 basis points to 4.10% on Tuesday.
- February's Australian employment report is forecast to show 20.3K jobs added in February.
AUD/USD gained around 1.25% on Monday, bouncing from last week's lows to settle around 0.7070. The pair has been in a choppy range since peaking near 0.7190 in early February, with price pulling back repeatedly toward the 0.7000 area before recovering. Monday's session closed near the middle of this range, with the daily candle's structure suggesting the move was driven by broad US Dollar weakness rather than fresh Australian Dollar buying conviction.
The Reserve Bank of Australia (RBA) is set to deliver its latest interest rate decision on Tuesday, with markets pricing in a 25 basis point hike to 4.10%. The move would mark the RBA's second consecutive increase and underscores the Board's continued concern over persistent inflationary pressures, with trimmed mean inflation still well above the 2%-3% target band. Thursday's employment data will be the next major test, with consensus pointing to 20.3K new jobs and the unemployment rate expected to edge up to 4.2%.
On the US Dollar (USD) side, easing tensions surrounding the Strait of Hormuz closure pushed traders away from safe-haven USD positioning, softening the Greenback broadly. March's NY Empire State Manufacturing Index came in at -0.2, well below the 3.2 consensus, adding to the picture of softening US economic momentum. The Federal Reserve's (Fed) rate decision on Wednesday, expected to hold at 3.75% and accompanied by an updated Summary of Economic Projections (SEP), is the week's dominant event for USD direction.
AUD/USD daily chart
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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