AUD/USD steadies around 0.6700 with the US Dollar trimming gains
- AUD/USD appreciates for the second consecutive day to reach levels above 0.6700.
- Strong US economic data and hawkish Fedspeak buoyed the Greenback on Thursday.
- RBA-Fed monetary policy divergence is supporting the Aussie.
The Aussie Dollar appreciates against its US counterpart for the second consecutive day on Friday, returning to levels above 0.6700 at the time of writing, after bouncing from the 0.6665 area. The pair is on track to a 0.3% weekly appreciation and nearly 4% aboove December lows amid hopes that the next move by the Reserve Bank of Australia will be a rate hike.
Australia’s Consumer Inflation Expectations report, released on Thursday, showed price pressures easing to 4.6% in January, from 4.7% in December. Inflation, however, remains above the RBA’s 2% to 3% target for price stability, adding pressure on the RBA to tighten its monetary policy.
In the US, recent data supported the view that the US Federal Reserve /Fed) will keep interest rates unchanged, at least in the first quarter of the year.
The US Labour Department revealed that Jobless claims declined to their lowest levels since November last week, while manufacturing figures from the New York and Philadelphia regions hinted at a significant improvement in the sector’s business conditions in January.
Some Fed officials have warned against further rate cuts amid the sticky inflation levels, but the US Central bank is still expected to ease its monetary policy at least once in 2026. The RBA, on the contrary, has left interest rates unchanged at its last meetings, and the market is starting to price in a rate hike. This is likely to keep the Aussie Dollar supported, at least until February’s meeting.
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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