Australian Dollar edges higher as Trade Balance shifts back into surplus
- AUD/USD drifts higher to near 0.7135 in Thursday’s early Asian session.
- Australia’s Trade Balance turns positive in April.
- Iranian officials said there was no 'tangible progress' in war talks.
The AUD/USD pair gathers strength to around 0.7135 during the early Asian session on Thursday. The Australian Dollar edges higher against the US Dollar (USD) following the domestic Trade Balance data. The US May Nonfarm Payrolls (NFP) report will take center stage later on Friday.
Australia's Trade Balance shifted back into a monthly surplus of $1,791M MoM for April, according to the Australian Bureau of Statistics (ABS) on Thursday. This figure followed a deficit of 1,024M in the previous reading (revised from $1,841M).
Meanwhile, Australia's Exports climbed by 7.2% MoM in April from a fall of 2.5% seen a month earlier (revised from -2.7%). Imports increased by 0.8% MoM in April, compared to a rise of 12.2% seen in March (revised from 14.1%).
A better trade balance figure can signal strong export demand or a resilient economy. This report could lead markets to expect that the Reserve Bank of Australia (RBA) will hike interest rates or keep them elevated, supporting the Aussie.
On the other hand, ongoing tensions in the Middle East and a lack of progress in the US-Iran peace deal could boost a safe-haven currency such as the Greenback. Iran’s Foreign Minister Abbas Araghchi said on Wednesday that while contact with Washington has not been cut off, negotiations to end the Middle East war had made "no tangible progress.”
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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