AUD/USD holds firm as US Dollar retreats despite firm PPI
- AUD/USD trades little changed on Friday as the US Dollar retreats despite strong PPI data.
- RBA rate hike bets continue to underpin the Australian Dollar.
- Markets await Australia’s TD-MI Inflation Gauge and the US Manufacturing PMI on Monday.
The Australian Dollar (AUD) trades flat against the US Dollar (USD) on Friday as the Greenback reverses earlier gains despite stronger-than-expected US Producer Price Index (PPI) data. At the time of writing, AUD/USD is trading around 0.7112 and is on track for an eighth consecutive week of gains.
The headline PPI rose 0.5% MoM, beating the 0.3% forecast, while December’s figure was revised down to 0.4% from 0.5%. On a yearly basis, PPI increased 2.9%, above expectations of 2.6%, though slightly below the previous 3.0% reading.
Core PPI, which excludes food and energy, climbed 0.8% MoM, well above the 0.3% estimate and accelerating from December’s revised 0.6% gain. On an annual basis, core producer inflation advanced to 3.6% from 3.3%.
The data reinforces what Federal Reserve (Fed) officials have been signaling in recent weeks, that inflation pressures remain sticky and progress toward the 2% target is uneven. The stronger core reading in particular supports the case for keeping monetary policy restrictive for longer, even as markets continue to debate the timing of the interest rate cuts.
According to the CME FedWatch Tool, markets widely expect the Fed to keep interest rates unchanged at the March and April meetings. The probability of a June rate cut has declined, with July now seen as the preferred timing for the Fed to resume easing later this year.
The shift in rate-cut expectations could help limit deeper losses in the US Dollar. However, a meaningful recovery may remain unlikely as renewed uncertainty surrounding US trade policy continues to weigh on overall market sentiment.
Apart from broad US Dollar weakness, the Aussie remains well supported by hawkish Reserve Bank of Australia expectations, as inflation remains above the RBA’s 2-3% target range.
While the Board may pause in March to assess the impact of February’s hike, markets and major banks including CBA, Westpac, ANZ and NAB expect another 25-basis-point increase at the May meeting, which would lift the cash rate to 4.10%.
Attention now turns to Australia’s TD-MI Inflation Gauge due on Monday. In the United States, traders will also look ahead to the Manufacturing Purchasing Managers’ Index (PMI) release.
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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