AUD/USD drops below 0.6350 as US Dollar clings to intraday gains
- AUD/USD falls slightly below 0.6350 as the US Dollar performs strongly on the Fed’s ‘higher for longer’ interest rate stance.
- The RBA cut its OCR by 25 bps to 4.10%, as expected, but guided a cautious interest rate cut stance.
- RBA Bullock said that the battle against inflation is far from over.
The AUD/USD pair is down a little over 0.1% below 0.6350 in Tuesday’s North American session. The Aussie pair faces pressure as the US Dollar (USD) holds onto intraday gains driven by firm expectations that the Federal Reserve (Fed) will keep interest rates in the current range of 4.25%-4.50% for a longer period.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to near 107.00.
Fed officials have guided that interest rates should remain at their current levels, given that inflation is still elevated, labor demand is balanced and the United States (US) economic growth is resilient. For more cues on the monetary policy outlook, investors will focus on the Federal Open Market Committee (FOMC) minutes, which will be released on Wednesday.
Meanwhile, the Australian Dollar (AUD) underperforms after the Reserve Bank of Australia’s (RBA) monetary policy outcome, in which the central bank announced its first interest rate cut decision since November 2020. The RBA cut its Official Cash Rate (OCR) by 25 basis points (bps) to 4.10%, as expected.
Investors had already anticipated a 25-bps interest rate reduction as inflationary pressures in the Australian economy have been easing. RBA Governor Michele Bullock guided that the central bank will remain cautious on interest rate cuts as it is too early to declare victory over inflation.
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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