AUD/USD drifts lower amid cautious RBA, global trade uncertainty
- AUD/USD retreats to 0.6460 as Aussie loses ground after Monday’s rally.
- RBA minutes reveal that the board debated a 50 bps interest rate cut but opted for a 25 bps cut to preserve predictability.
- Focus shifts to US JOLTS Job Openings due later in the day, Wednesday’s Australian GDP and Friday’s NFP for fresh cues.
The Australian Dollar (AUD) slips against the US Dollar (USD) on Tuesday, retreating from recent highs to 0.6460 as traders react to the Reserve Bank of Australia’s (RBA) cautious tone and softer-than-expected current account figures. AUD/USD is hovering near 0.6458 at the time of writing, trimming Monday’s solid 1% rally. While the pair remains confined to a narrow range since late April, repeated rejections near the 0.6500 psychological barrier continue to cap the upside. Meanwhile, the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, is staging a mild rebound after Monday’s dip, holding near a six-week low around 98.95, adding to the downside pressure on the Aussie.
The minutes from the Reserve Bank of Australia's (RBA) May meeting, released earlier, revealed that the board considered a 50-basis-point (bps) interest rate cut but ultimately opted for a more measured 25-bps reduction, lowering the cash rate to 3.85% from 4.10%. This decision was made to maintain policy predictability amid heightened global uncertainties around US tariffs.
Speaking in Brisbane on Tuesday, RBA Assistant Governor Sarah Hunter struck a cautious tone, warning that rising global trade uncertainty could weigh heavily on investment, output, and employment. “The unpredictability and unprecedented nature of the current situation makes it hard to be precise on the size of the impact,” Hunter noted, adding that the central bank will be closely monitoring how these developments unfold in order to adjust its policy stance accordingly.
The RBA also noted that while inflation had returned to the target range of 2.9% YoY and is projected to ease further to 2.6% by the end of 2025, it is still too early to shift to an expansionary policy stance. According to a Reuters report, markets are currently pricing in a roughly 70% chance of another rate cut in July, although some analysts believe the central bank may hold off until second-quarter inflation data provides clearer direction.
Looking ahead, traders will focus on a series of key macroeconomic releases. Australia’s Q1 GDP report, Industry Index and the S&P Global Composite and Services PMIs are all due on Wednesday and could offer fresh direction for the Aussie. On the US side, the JOLTS Job Openings data to be published later on Tuesday, and the highly anticipated Friday’s Nonfarm Payrolls (NFP) report will be closely watched for further insight into the labor market and the Federal Reserve’s (Fed) next moves.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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