AUD/USD slips below 0.6700 as Australia’s inflation expectations ease
- AUD/USD slips as Australia’s Consumer Inflation Expectations ease to 4.6% in January from 4.7%.
- US Retail Sales rose 0.6% to $735.9 billion in November, beating expectations after October’s 0.1% decline.
- Morgan Stanley delayed rate cut expectations to June and September from January and April after strong jobs data.
AUD/USD edges lower after registering slight gains in the previous session, trading around 0.6680 during the Asian hours on Thursday. The pair loses ground after Australia’s Consumer Inflation Expectations were released. The January reading edged down to 4.6% from 4.7% in the previous month, indicating that households continue to anticipate elevated price pressures.
The Reserve Bank of Australia (RBA) kept the cash rate unchanged at 3.6% for a third consecutive meeting in December. Policymakers acknowledged that inflation has eased markedly from its 2022 peak, although recent data point to renewed momentum. Headline inflation slowed to 3.4% YoY in November, the lowest since August, but it remains above the RBA’s 2–3% target range.
The US Census Bureau reported on Wednesday that Retail Sales rose more than expected to $735.9 billion in November, up 0.6%, following a 0.1% contraction in October and beating market expectations of a 0.4% increase. Meanwhile, the Producer Price Index (PPI) came in hot in November, with both headline and core measures reaching 3% year-over-year (YoY). Traders will monitor the weekly US Initial Jobless Claims report later on Thursday, alongside remarks from Federal Reserve officials.
Data released last week showed the US Unemployment Rate edged lower to 4.4% in December. Together, these releases strengthen the case for the US Federal Reserve (Fed) to keep interest rates on hold for the next several months, potentially lending support to the US Dollar (USD). Morgan Stanley analysts subsequently pushed back their expectations for rate cuts to June and September from January and April, following Friday’s jobs report.
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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