Australian Dollar holds steady amid RBNZ rate hike bets, weak PMI data
- AUD holds firm despite October PMI data revealing the first private-sector contraction since May.
- RBNZ rate hike odds jumped to 45% following Andrew Hauser's warnings of a worsening inflation outlook.
- Gains for AUD/USD may be capped as US Treasury yields rebound and support the US Dollar.
AUD/USD holds ground after posting modest losses in the previous day, trading around 0.7020 during early European hours on Friday. The pair remains steady as the Australian Dollar (AUD) holds ground following the release of preliminary S&P Global Purchasing Managers' Index (PMI) data. The S&P Global Composite PMI declined to 47.7 in October from 51.3 in September, marking the lowest reading since March and the first contraction in private-sector activity since May.
Meanwhile, the Manufacturing PMI inched up to 49.7 in October from a 21-month low of 49.6 in September, registering its second straight month of contraction. Services PMI also eased to 47.8 in October from 51.9 in September, marking its first contraction since May and lowest reading since March, though new business remained in expansion despite a clear slowdown in growth.
Traders have raised their bets on a Reserve Bank of Australia (RBA) rate hike following remarks from RBA monetary policy board member Andrew Hauser. On Wednesday, Hauser warned that the inflation outlook was "materially worse" for the coming months. According to the Guardian, the probability of an interest rate hike at the November policy meeting jumped from 30% prior to Hauser’s comments to 45%. If delivered, this would mark the fifth rate rise of the year, lifting the Official Cash Rate (OCR) target from 4.6% to 4.85%, its highest level since the global financial crisis.
However, upside potential for the AUD/USD pair could be restrained as the US Dollar (USD) recovers ground. The yield on the US 10-year Treasury note rebounded to near 4.98% on Friday after sliding by more than 10 basis points the previous day to a one-month low. US bonds had previously faced upward pressure from safe-haven flows triggered by a deepening selloff in technology and artificial intelligence stocks. Growing concerns regarding the sustainability of AI investments, a major engine of US economic growth, have also prompted financial markets to scale back expectations for further Federal Reserve rate hikes.
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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