Australian Dollar reaches fresh three-year highs as RBA signals hawkish stance
- AUD/USD rises as RBA's Bullock says rates may rise again if inflation persists.
- Australia’s Inflation Expectations rose to 5.0% in February from 4.6%, ending seven months below 5%.
- The CME FedWatch tool suggests that markets price a 94% chance the Fed will hold rates, up from 80% previously.
AUD/USD extends its gains for the second successive session, reaching a three-year high of 0.7147 during the Asian hours on Thursday. The pair strengthened as the Australian Dollar (AUD) drew support after the Reserve Bank of Australia (RBA) signalled a continued hawkish stance.
RBA Governor Michele Bullock said on Thursday that the board remains prepared to raise rates further if inflation proves persistent, stressing that any inflation “with a three in front of it” is unacceptable. The board will be data-dependent and continually reassess forecasts.
Australia’s Consumer Inflation Expectations rose to 5.0% in February from 4.6% previously, ending seven months below 5%. The February increase was broad-based across various measures and reinforces the RBA Board’s decision to lift the cash rate target to 3.85%.
However, AUD/USD gains may be capped as the US Dollar (USD) strengthens after traders scaled back expectations for Federal Reserve (Fed) rate cuts following stronger-than-expected US jobs data released on Wednesday.
The CME FedWatch tool suggests that financial markets are now pricing in nearly a 94% probability that the Fed will leave rates unchanged at its next meeting, up from 80% from the previous day. The US Consumer Price Index (CPI) inflation report will be the highlight later on Friday.
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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