AUD/USD rebounds as US Dollar weakens on Fed independence concerns
- AUD/USD snaps a three-day losing streak as broad US Dollar weakness lifts the pair.
- Concerns over Fed independence weigh on the Greenback after reports of a DOJ probe involving Chair Powell.
- RBA-Fed policy divergence and hawkish Australian rate expectations provide additional support to the Aussie.
The Australian Dollar (AUD) gains traction against the US Dollar (USD) on Monday, with AUD/USD snapping a three-day losing streak as broad-based weakness in the Greenback lifts the pair. At the time of writing, AUD/USD trades around 0.6714, up nearly 0.35% on the day.
The US Dollar comes under renewed selling pressure after reports that the US Department of Justice (DoJ) issued grand jury subpoenas as part of a criminal investigation involving Federal Reserve (Fed) Chair Jerome Powell, raising fresh concerns over political pressure on the central bank.
Meanwhile, the US Dollar Index (DXY), which measures the Greenback's value against six major peers, is trading around 98.88 after retreating from one-month highs.
Powell stood his ground, saying the action is politically motivated and that the Fed must continue to set policy based on economic conditions rather than political pressure.
On the monetary policy front, growing policy divergence between the Fed and the Reserve Bank of Australia (RBA) keeps AUD/USD tilted to the upside.
The Fed remains on a gradual easing path after last week’s mixed US labour-market data trimmed expectations for a near-term rate cut, although traders continue to expect a total of around 50 basis points (bps) of easing this year.
Looking ahead, traders will closely watch the US Consumer Price Index (CPI) data due on Tuesday for further clues on the Fed’s policy outlook, while also parsing remarks from key Fed officials throughout the week.
In Australia, markets are increasingly anticipating that the RBA’s next move could be a rate hike, as the latest inflation data show price pressure remains above the central bank’s 2-3% target band.
In a recent interview with ABC News, RBA Deputy Governor Andrew Hauser said it was “still true” that Australians had likely seen the last rate cuts this cycle. Meanwhile, an Australian Financial Review survey showed that 17 of 38 economists now expect at least two rate hikes over the next 18 months.
On the data front, the Australian economic calendar remains relatively light this week, with Westpac Consumer Confidence scheduled for Tuesday and Consumer Inflation Expectations due on Thursday. Markets will also track China’s trade data on Wednesday, as developments in exports and imports often influence the Aussie due to Australia’s close economic ties with China.
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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