AUD/USD weakens to near 0.6450 despite weaker US NFP data
- AUD/USD softens to near 0.6465 in Monday’s early Asian session.
- US NFP rose by 73,000 in July, weaker than expected.
- Traders will closely monitor the US-China trade negotiations.
The AUD/USD pair trades on a negative note around 0.6465 during the early Asian session on Monday, pressured by a modest rebound in the US Dollar (USD). The downside for the pair might be limited due to weaker-than-expected US employment data, which prompted expectations for the Federal Reserve (Fed) rate cuts this year.
Data released by the US Bureau of Labor Statistics (BLS) on Friday show that Nonfarm Payrolls (NFP) in the United States (US) rose by 73,000 in July, compared to a 14,000 increase (revised from 147,000) seen in June. This figure came in weaker than the market expectation of 110,000. Additionally, the Unemployment Rate ticked higher to 4.2% in July from 4.1% in June, as expected.
Fed funds futures traders ramped up bets on rate reductions again on Friday after the downbeat employment data, which might drag the Greenback lower. Traders are now pricing in 63 basis points (bps) of cuts by year-end, up from around 34 bps on Thursday, with the first cut seen in September.
The US and China failed to agree on extending a 90-day pause on tariffs during the latest round of talks held in Stockholm, Sweden. Any renewal of the pause is due to expire on August 12, and it will ultimately be up to US President Donald Trump. Meanwhile, US tariffs have been reduced from 145% to 30%, and Chinese duties from 125% to 10%. Traders will closely monitor the development surrounding the US-China trading agreement. Any signs of renewed turmoil could exert some selling pressure on the China-proxy Aussie, as China is a major trading partner of Australia.
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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