Australian Dollar down as Trump's euphoria overshadows RBA hawkishness
- AUD/USD falls after Donald Trump wins the US presidential election.
- Republican victory raises concerns about trade war with China, weighing on AUD.
- RBA's hawkish stance might limit the AUD losses
The AUD/USD pair plunged 1.25% to 0.6555 on Wednesday after Donald Trump's US presidential election victory sparked enthusiasm for the US Dollar. Fears of a trade war with China, fueled by the Republican victory, weighed on the Australian Dollar.
However, the Reserve Bank of Australia's (RBA) hawkish stance might limit the AUD losses as this week Governor Michelle Bullock highlighted the need to maintain rates at restrictive levels to control inflation.
Daily digest market movers: Australian Dollar declines on Trump’s victory
- AUD/USD plunged over 130 pips due to increased USD demand driven by Trump's election victory projections.
- US Dollar Index (DXY) surged to a four-month high after exit polls indicated Republican dominance.
- Republicans are poised to control the House and Senate, raising concerns over tariffs and trade wars with China.
- Deficit spending fears and reduced rate cut expectations boosted US Treasury yields, supporting the USD.
- That being said, RBA's hawkish stance, emphasizing the need for restrictive interest rates, might support the AUD.
- RBA Governor Bullock highlighted the importance of maintaining high interest rates to combat inflationary pressures.
- Signs of China's economic recovery limited losses for the Aussie, leading to intraday short-covering.
AUD/USD technical outlook: Pair rides on bearish momentum, recovery halted
The Relative Strength Index (RSI) is in the negative area and declining sharply, suggesting that selling pressure is rising. The Moving Average Convergence Divergence (MACD) is also bearish, with the histogram flat and red. Overall, the technical outlook is bearish, and the pair could potentially test the 0.6450 support level if the bearish momentum continues.
The AUD/USD pair's inability to break above the convergence of the 200 and 20-day Simple Moving Averages (SMAs) at approximately 0.6630 signaled a bearish reversal. This rejection suggests that the upward momentum seen in recent weeks has been exhausted, and the pair is poised for further declines.
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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