AUD/USD strengthens above 0.6700 as traders await US data
- AUD/USD strengthens to around 0.6715 in Tuesday’s early Asian session.
- Traders brace for US economic data over Venezuela events.
- Rising bets for RBA rate hikes could support the Australian Dollar.
The AUD/USD pair gains traction near 0.6715 during the early Asian session on Tuesday, bolstered by a softer US Dollar (USD). Traders await a raft of key US economic data this week, including Nonfarm Payrolls (NFP), for clues on the monetary policy outlook. On the Aussie front, the Consumer Price Index (CPI) inflation data for November is due on Wednesday.
The United States (US) carried out a large-scale military strike against Venezuela on Saturday. US President Donald Trump announced that Venezuelan President Nicolas Maduro and his wife have been captured and flown out of the country. On Monday, Maduro pleaded not guilty to US charges in a narco-terrorism case against him, kicking off an extraordinary legal battle with major geopolitical ramifications, per Bloomberg.
Nonetheless, markets are largely shrugging off events in Venezuela, after a US raid led to the capture of Maduro and his wife. The US December employment report will take center stage on Friday and could offer some hints about the outlook for monetary policy. The market consensus forecast for NFP is for a gain of 55,000 jobs. In case of a stronger-than-expected outcome, this could strengthen the US Dollar (USD) and create a headwind for the pair.
Growing expectations for interest rate hikes by the Reserve Bank of Australia (RBA) could provide some support to the Aussie. The hawkish comments by RBA Governor Michelle Bullock after the December monetary policy decision showed that policymakers’ concerns about inflation have taken center stage and that the possibility of a rate hike was on the table last month. Analysts note that a hotter-than-expected core inflation reading for the fourth quarter could trigger a rate hike at the RBA’s February 3 meeting.
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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