Australian Dollar remains close to three-year top vs. USD; AUD/USD eyes 0.7100 mark
- AUD/USD gains some positive traction on Monday amid a combination of supporting factors.
- The divergent Fed-RBA policy expectations lend support to the AUD amid a positive risk tone.
- Hopes for more stimulus from China benefit the Aussie and back the case for further upside.
The AUD/USD pair attracts some buyers in the vicinity of mid-0.7000s during the Asian session on Monday and, for now, seems to have stalled its corrective pullback from a three-year high, touched last week. Spot prices currently trade around the 0.7080 region, up 0.10% for the day, and seem poised to appreciate further amid a supportive fundamental backdrop.
The US Dollar (USD) continues with its struggle to attract any meaningful buyers and extends its sideways consolidative price in a familiar range held over the past week or so amid dovish Federal Reserve (Fed) expectations. In fact, traders ramped up their bets that the US central bank will lower borrowing costs in June following the release of softer US consumer inflation figures on Friday.
Moreover, the Fed is expected to deliver at least two 25 basis points (bps) rate cut in 2026. This marks a significant divergence in comparison to expectations that the Reserve Bank of Australia (RBA) will hike interest rates again in May, which continues to act as a tailwind for the Australian Dollar (AUD) and validates the constructive outlook for the AUD/USD pair amid a positive risk tone.
Meanwhile, China's inflation figures released last week fueled concerns that deflationary pressures continue to weigh on the world’s second-largest economy. The data raised hopes for more fiscal and monetary stimulus from China, which further benefits the China-proxy Aussie. The focus shifts to the release of the FOMC Minutes on Wednesday and Australian employment details on Friday.
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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