AUD/USD is struggling to regain the 0.6500 level with risk appetite subdued
- Ongoing geopolitical tensions are hurting risk appetite and limiting Aussie's upside attempts.
- Recent data from China cast doubts about the property sector's recovery.
- Later today, the Fed's monetary policy decision will set the US Dollar's direction.
The Australian Dollar is paring some of Tuesday’s losses, favoured by a mildly weaker US Dollar on Wednesday. The pair, however, remains unable to consolidate above 0.6500 with investors cautious amid geopolitical tensions ahead of the US Fed monetary policy decision.
The Israel-Iran war reaches its sixth day with Tel Aviv pounding the Islamic Republic tirelessly and the US threatening to get involved after President Trump demanded the unconditional surrender of Tehran´s authorities.
Concerns about a widespread regional war and its potential impact on commodity prices and on global economic growth are keeping the sentiment-linked AUD on its back foot.
News from China is failing to provide any significant support, either. Data released earlier this week showed that prices of new properties in the country’s main capitals fell 0.2% in May. Prices of second-hand homes declined 0.5% and real estate investment declined beyond 10%, putting into question the property sector’s recovery and casting doubts on China’s economic outlook.
The highlight today is the Federal Reserve’s monetary policy decision, with particular interest in the economic and interest rate projections, for further clues about the bank’s easing calendar. These data and Chairman Powell's comments are likely to define the US Dollar’s near-term direction.
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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