AUD/USD holds above 0.6700, all eyes on Fed rate decision

Source Fxstreet
  • AUD/USD trades with mild gains around 0.6705 in Monday’s early Asian session. 
  • The two-day FOMC meeting ends Wednesday with an expected rate cut.  
  • The Chinese Retail Sales and Industrial Production came in worse than expected.

The AUD/USD pair posts modest gains near 0.6705 during the early Asian session on Monday. The uptick of the pair is supported by the weakness of the US Dollar (USD). However, the concerns about the economic slowdown in China might cap the upside for the China-proxy Australian dollar (AUD). All eyes will be on the US Federal Reserve (Fed) interest rate decision on Wednesday. 

Markets are largely split on whether the US Fed will cut rates by 25 basis points (bps) to a range of 5.0% to 5.25% or by 50 bps at its upcoming monetary policy meeting. According to the CME FedWatch Tool, the markets have priced in nearly 49% probability of a Fed larger rate cut, a significant jump from a 28% chance one day prior. Investors will take more cues from the FOMC Press Conference for the outlook of the US interest rate. If Powell indicated to ease more aggressively, this could exert some selling pressure on the Greenback and create a tailwind for AUD/USD. 

On the other hand, the disappointing Chinese economic data released on the weekend might weigh on the Aussie as China is Australia's largest trading partner. Data released by the National Bureau of Statistics (NBS) on Saturday showed that Chinese Retail Sales rose 2.1% YoY in August from 2.7% in July, while Industrial Production increased 4.5% YoY in the same period versus 5.1% prior. Both figures came in below the market consensus. 

On Thursday, the Australian employment data will be released. The Reserve Bank of Australia (RBA) Assistant Governor (Economic) Sarah Hunter said last week that “the labor market is still tight relative to full employment.” and the RBA’s stance is that “further falls in vacancies can still occur alongside a relatively modest increase in the unemployment rate. The remarks support the RBA’s case against near-term rate cuts, which might lift the AUD against the USD. 
 

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.



 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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