AUD/USD remains on the defensive around 0.6700, eyes on US CPI inflation data

Source Fxstreet
  • AUD/USD trades in negative territory around 0.6715 in Thursday’s early Asian session. 
  • The rising speculation of a 25 bps rate cut by the Fed in November underpins the USD. 
  • The disappointment over additional China’s stimulus measures weighs on the Aussie. 

The AUD/USD pair remains under some selling pressure near 0.6715 on Thursday during the early Asian session. The further upside in the Greenback and Chinese demand concerns create a headwind for AUD/USD. Investors will closely monitor the release of the key US Consumer Price Index (CPI) inflation data, which is due later on Thursday.

The Federal Open Market Committee (FOMC) Minutes from the September meeting showed the “substantial majority” of the FOMC backed a 50-basis-point (bps) cut. Additionally, some officials would’ve preferred a 25 bps cut, and "a few others" mentioned they could have supported such a move.

The upbeat US September jobs report last week eased worries about the cooling labor market and prompted traders to raise bets of a quarter-point rate cut in November, which boosted the US Dollar (USD) broadly.

Traders will keep an eye on the US CPI inflation data on Thursday. The headline US CPI inflation is expected to decrease from 2.5% in August to 2.3% in September, while the core CPI inflation is estimated to remain unchanged compared to August’s figure at 3.2% YoY. Nevertheless, if inflation comes in softer than expected, it could open the door for a larger Fed’s easing cycle, which could exert some selling pressure on the USD. 

On the Aussie front, the disappointment over China's stimulus update, the firmer USD continue to undermine the Australian Dollar (AUD). Nonetheless, the hawkish stance from the Reserve Bank of Australia (RBA) could cap the pair’s downside. The recent data showed Retail Sales growth for August exceeding expectations, reducing the chances of an early rate cut from the RBA.

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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