AUD/USD falls back below 0.6800 as US job data wipes out Fed large rate cut bets
- AUD/USD returns below 0.6800 as Fed large rate cut bets wane.
- US economic slowdown risks have been shrunk by the upbeat US NFP for September.
- Dismal market sentiment weighs heavily on the Australian Dollar.
The AUD/USD pair retreats after a short-lived pullback move slightly above the crucial resistance of 0.6800 in Monday’s European session. The Aussie asset continues its losing streak as the US Dollar (USD) gains further after the upbeat United States (US) employment data for September forced traders to unwind Federal Reserve (Fed) large rate cuts bets for the upcoming policy meeting in November.
Market participants expect the Fed to cut interest rates further by 25 basis points (bps) to 4.50%-4.75% in November after the US job report pointed a sharp increase in the number of payrolls and a stronger-than-expected wage growth. Before the US Nonfarm Payrolls (NFP) data release, financial markets were anticipating the Fed to continue with the larger-than-usual interest rate cut of 50 bps.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises further to near 102.60.
For more clarity on the Fed’s interest rate action in November, investors will pay close attention to the US Consumer Price Index (CPI) data for September, which will be released on Thursday. The core CPI – which excludes volatile food and energy prices – is estimated to have grown steadily by 3.2%.
Meanwhile, the Australian Dollar (AUD) is under pressure due to risk-off market sentiment, driven by Middle East tensions. Historically, geopolitical risks weaken the appeal of risk-sensitive assets. Going forward, the next move in the AUD will be driven by the Reserve Bank of Australia (RBA) minutes of the September policy meeting. The RBA kept its Official Cash Rate (OCR) unchanged at 4.35% and didn’t offer any timeline to kickstart the rate-cut cycle.
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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