Australian Dollar moves little following RBA’s Kent cautious remarks
- AUD/USD remains silent after RBA’s Christopher Kent warned of inflation risks from rising energy prices.
- The Australian Dollar struggled after softer domestic inflation data on Wednesday.
- The US Dollar holds firm as markets track Middle East developments, with uncertainty over efforts to resolve the Iran conflict.
AUD/USD steadies after two days of losses, trading around 0.6950 during the Asian hours on Thursday. The pair trades flat as the Australian Dollar (AUD) stays steady. This follows Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent's warning that policymakers may need to contain inflation amid rising energy prices. Kent also noted the board will target low, stable inflation and full employment. This may lift short-run neutral rates and require tighter policy.
However, the Australian Dollar weakened after softer domestic inflation data on Wednesday. Australia’s annual CPI slowed to 3.7% in February from 3.8% in January. The trimmed mean CPI came in at 3.3%, below the 3.4% forecast and in line with January’s revised figure.
Meanwhile, the AUD/USD pair remains subdued as the US Dollar (USD) holds firm. Markets are watching Middle East developments closely, with uncertainty surrounding efforts to end the Iran conflict.
The White House said talks are ongoing, with the Trump administration reportedly sending a 15-point proposal to Iran via Pakistan. Senior Iranian officials are reviewing the proposal but show little willingness to engage with Washington. Tehran is also expected to reject a US ceasefire offer, instead proposing a five-point plan that includes sovereign control over the Strait of Hormuz.
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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