Australian Dollar gathers strength as RBA hikes rates, Fed rate decision looms
- AUD/USD edges higher to around 0.7115 in Wednesday’s Asian session.
- The RBA hiked the OCR by 25 bps to 4.10% from 3.85% at its March monetary policy meeting
- Markets expect the Fed to leave the rates unchanged on Wednesday.
The AUD/USD pair gains traction to near 0.7115 during the Asian trading hours on Wednesday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) after a hawkish interest rate hike from the Reserve Bank of Australia (RBA). All eyes will be on the US Federal Reserve (Fed) interest rate decision later on Wednesday.
As widely expected, the Australian central bank hikes the Official Cash Rate (OCR) by 25 basis points (bps) to 4.10% at its March meeting on Tuesday. This marks the second consecutive rate hike of the year, following a 25 bps increase in February.
RBA Governor Michele Bullock said during the press conference that prices remained too high and the board was worried about second-round effects from higher energy costs, triggered by the Middle East conflict. She emphasized that the decision to move on Tuesday didn’t imply anything about the future path of policy. However, a hawkish tone from the RBA provides some support to the Aussie against the USD.
The Fed is expected to keep its key interest rate on hold at its March policy meeting on Wednesday to give policymakers a chance to see how the war affects the US economy. Fed Chair Jerome Powell will hold one of his final press conferences before his term ends in May. Due to geopolitical uncertainty, many analysts believe the US central bank may not cut rates until October or December 2026.
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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