AUD/USD flat lines near 0.6500 ahead of PBoC rate decision
- AUD/USD trades flat around 0.6505 in Monday’s early Asian session.
- Rising US tariff risks could weigh on the China-proxy Aussie, but the Fed’s dovish remarks might cap the pair’s downside.
- The PBoC is expected to hold its benchmark lending rates steady on Monday.
The AUD/USD pair holds steady near 0.6505 during the early Asian session on Monday. Rising US tariff risks could weigh on the China-proxy Aussie as a tariff deadline with the US looms. Investors brace for the People’s Bank of China (PBoC) interest rate decision later on Monday.
China’s Commerce Minister Wang Wentao said on Friday that China wants to bring its trade relationship with the US back to a stable footing, adding that recent talks in Europe showed there was no need for a tariff war while urging the US to act in a manner befitting of a superpower.
China has an August 12 deadline to reach a long-term tariff agreement with the US, after a preliminary deal last month to end increasing tariffs. However, the tariff uncertainty and signs of renewed trade tensions between the US and China could exert some selling pressure on the Australian Dollar (AUD), as China is a major trading partner of Australia.
On the other hand, dovish comments from the US Federal Reserve (Fed) official could drag the US Dollar (USD) lower and act as a tailwind for the pair. Fed Governor Christopher Waller said late Thursday that the labor market is doing fine overall but less so in the private sector. Waller believes that the Fed should reduce its interest rate target at the July meeting, citing mounting economic risks.
According to Reuters, financial markets are now pricing in a September starting date for rate cuts, and Fed officials penciled in two easings at their June meeting.
The PBoC is widely expected to leave its Loan Prime Rate (LPR) unchanged at its July meeting as signs of economic resilience reduced the urgency for further monetary easing. The attention will shift to the Politburo meeting later this month, which is likely to shape economic policy for the rest of the year.
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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