Australian Dollar declines to near 0.7050 as trade surplus narrows in January
- AUD/USD weakens to near 0.7065 in Thursday’s Asian session.
- Australia's Trade Surplus shrank to 2,631M MoM in January, below estimates.
- Wider conflict in the Middle East boosts the US Dollar, a safe-haven currency.
The AUD/USD pair attracts some sellers to around 0.7065 during the Asian trading hours on Thursday. The Australian Dollar (AUD) weakens against the US Dollar (USD) as Australia's trade surplus narrows unexpectedly in January. Traders will closely monitor the developments surrounding the US, Israel and Iran tensions. The US weekly Initial Jobless Claims report is due later on Thursday.
Data released by the Australian Bureau of Statistics on Thursday showed that Trade Surplus narrowed to 2,631M MoM in January, below the market consensus of 3,900M. This followed December’s surplus of 3,373M.
Additionally, Australia's Exports declined by 0.9% MoM in January, versus a rise of 0.9% seen a month earlier (revised from 1.0%). Imports rose by 0.8% MoM in January, compared to a fall of 1.8% seen in December (revised from 0.8%). The Aussie edges slightly lower following a narrower-than-expected surplus.
Nonetheless, the hawkish stance of the Reserve Bank of Australia (RBA) could underpin the Aussie against the USD. RBA Governor Michelle Bullock said after the December monetary policy decision that policymakers’ concerns about inflation have taken center stage and that the possibility of a rate hike was on the table. Growing expectations for interest rate hikes by the Australian central bank could lift the AUD against the USD.
Israel said it was launching new strikes across Iran as well as against what it described as Hezbollah infrastructure in Beirut. Meanwhile, Iran launched a drone attack on an Amazon data center in Bahrain. Persistent geopolitical risks in the Middle East could boost the safe-haven flows, supporting the Greenback.
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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