AUD/USD gathers strength to near 0.6450 amid renewed tariff concerns
- AUD/USD gains traction to around 0.6445 in Friday’s early Asian session.
- The renewed tariff concerns weigh on the US Dollar.
- Rising bets of further RBA rate cuts might cap the pair’s upside.
The AUD/USD pair gains ground to near 0.6445 during the early Asian session on Friday. The US Dollar (USD) edges lower against the Australian Dollar (AUD) due to the resurgence of trade uncertainty and disappointing US economic data. The US April Personal Consumption Expenditures (PCE) Price Index report Will be in the spotlight later on Friday.
A US federal court on Wednesday blocked US President Donald Trump's "Liberation Day" tariffs from going into effect. A federal trade court ruled Trump didn't have the authority to impose across-the-board duties on imports from nations that sell more to the US than they buy.
However, a federal appeals court late Thursday temporarily paused a sweeping ruling against Trump’s global tariffs while it takes more time to consider the administration’s request for a longer-lasting hold. The uncertainty of Trump's policies and concerns that tariffs will slow the economy drag the Greenback lower and create a tailwind for the pair.
Data released by the US Department of Labor (DOL) on Thursday showed that US Initial Jobless Claims for the week ending May 24 climbed to 240K, compared to the previous week of 226K (revised from 227K). This figure came in above the market consensus of 230K. Additionally, Continuing Jobless Claims increased by 26K to reach 1.919M for the week ending May 17.
On the other hand, the expectation that the Reserve Bank of Australia (RBA) will deliver more rate cuts in the upcoming policy meetings could undermine the Aussie. The RBA acknowledged progress in curbing inflation and warned that US-China trade barriers pose downside risks to economic growth. RBA Governor Michele Bullock noted that the central bank will take additional action if the economic outlook worsens, raising the chance of further rate cuts.
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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