Australian Dollar edges higher ahead of Chinese PMI releases
- AUD/USD drifts higher to around 0.7130 in Thursday’s early Asian session.
- Australian CPI inflation surged in March, driven by the war in the Middle East, which increased energy costs.
- Federal Reserve officials left interest rates unchanged at the April meeting on Wednesday.
The AUD/USD pair gathers strength to near 0.7130 during the early Asian session on Thursday. The Australian Dollar (AUD) edges higher against the US Dollar (USD) on hotter domestic inflation data. Traders brace for the release of the Chinese Purchasing Managers Index (PMI) data later on Thursday, which could give direction to the China-proxy Aussie.
Australia’s Consumer Price Index (CPI) climbed by 4.6% year-over-year (YoY) in March, versus a 3.7% increase prior, the Australian Bureau of Statistics (ABS) revealed on Wednesday.
While the figure was slightly below the 4.7% forecast, it remains well above the Reserve Bank of Australia’s (RBA) target range, keeping pressure on the central bank to hike rates. This, in turn, provides some support to the AUD against the USD. The monthly CPI came in at 1.1% in March, compared to the previous reading of 0%.
The Federal Open Market Committee (FOMC) on Wednesday voted 8-4 to hold rates in a range of 3.5% to 3.75%. That marked the first time four FOMC members dissented since October 1992. The committee noted that "inflation is elevated, in part reflecting the recent increase in global energy prices.”
Fed Chair Jerome Powell said during a press conference that he will continue to serve as a Fed governor for an indefinite period even after his chairmanship ends. Kevin Warsh, Trump’s nominated successor, appears on track to take over for Powell at the central bank.
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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