AUD/USD tumbles to a five-year low below 0.6000 amid US-China tariffs war
- AUD/USD falls to around 0.5985 in Monday’s early Asian session.
- China hit back against Donald Trump’s trade war.
- US NFP rose by 228,000 in March, but the Unemployment Rate increased to 4.2%.
The AUD/USD pair tumbles to near 0.5985 for the first time since the COVID-19 pandemic during the early Asian session on Monday. The Australian Dollar (AUD) weakens as China slapped a 34% tax on all US imports in retaliation for US President Donald Trump’s tariffs, raising fear of a trade war between the United States and China.
China announced last Friday that it will impose a 34% tax on all US imports, taking effect Thursday, as part of a retaliatory reaction to Trump's tariffs. This marks Beijing's toughest retaliation to the American leader's trade war. The concerns over trade tensions between the world's two biggest economies exert some selling pressure on the China-proxy as China is a major trading partner to Australia.
Data released by the Labor Department on Friday showed that the US Nonfarm Payrolls (NFP) was stronger than expected in March, rising by 228,000 from the revised 117,000 in February. Meanwhile, the Unemployment Rate ticked up to 4.2% in March versus 4.1% prior, higher than the 4.1% forecast.
The Federal Reserve (Fed) officials might wait until June to start cutting interest rates after the employment report showed stronger than expected jobs growth last month that eased concern about the state of the labor market. Still, the markets continue to price a full percentage point of Fed rate cuts by year-end and some chance of a fifth cut. The rising bets for more Fed rate reductions could weigh on the Greenback and might help limit the pair’s losses.
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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