AUD/USD gathers strength above 0.6500 as Fed rate cut bets remain intact
- AUD/USD strengthens to near 0.6510 in Monday’s early Asian session.
- Flash UoM Consumer Sentiment missed the consensus in August; Retail Sales came in line with the consensus.
- Softer China’s Retail Sales and Industrial Production might cap the upside for the China-proxy Aussie.
The AUD/USD pair gains ground around 0.6510 during the early Asian session on Monday. The US Dollar (USD) remains weak against the Australian Dollar (AUD) as US economic data keep the case for a September Federal Reserve (Fed) interest rate cut intact. Investors will keep an eye on the preliminary reading of the US S&P Global Purchasing Managers Index (PMI) data, which is due later on Thursday.
US Consumer Sentiment lost momentum in early August, declining to 58.6 in August from 61.7 in July, according to preliminary data from the University of Michigan (UoM). This figure came in worse than the expectation of 62.0 and signaled a poor backdrop in public confidence, which exerted some selling pressure on the Greenback.
Meanwhile, the US Retail Sales increased by 0.5% on a monthly basis in July, compared to a rise of 0.9% seen in June, the US Census Bureau reported on Friday. This reading came in line with the market consensus. Money markets are now pricing in nearly a 93% odds of a 25 basis points (bps) Fed rate cut in September, according to the CME FedWatch tool.
On the other hand, softer Chinese economic reports released on Friday might drag the China-proxy Aussie lower. The National Bureau of Statistics (NBS) showed on Friday that China’s Retail Sales increased 3.7% YoY in July, compared to 4.6% expected and 4.8% in June.
Meanwhile, Industrial Production rose 5.7% YoY in July versus 6.8% prior. This figure came in worse than the estimation of 2.7%. It’s worth noting that China is a major trading partner of Australia and weak Chinese data tends to have a negative impact on the AUD value.
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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