Australian Dollar flatlines below 0.7200 as US-Iran talks continue, China PMI looms
- AUD/USD trades flat near 0.7185 in Monday’s early Asian session.
- Iranian officials said no nuclear commitments were made as talks with the US continue.
- China’s RatingDog Manufacturing PMI report is due later on Monday.
The AUD/USD pair holds steady around 0.7185 during the early Asian trading hours on Monday. Traders continue to assess the developments surrounding the US-Iran peace negotiations. Also, China’s RatingDog Manufacturing Purchasing Managers Index (PMI) report for May will be released later on Monday.
Iranian Foreign Minister Abbas Araghchi said on Sunday that talks and message exchanges with the US were ongoing, but highlighted that no assessment of negotiations could be made until a clear outcome was reached. “Talks and message exchanges are ongoing, and until a definite result is reached, it is not possible to judge,” said Araghchi. “Everything being said now is speculation and should not be given importance,” he added.
Meanwhile, Iran's parliament speaker and top negotiator, Mohammad Bagher Ghalibaf, stated that Tehran will not accept any deal with Washington unless it ensures “the rights of the Iranian people are secured.” Any signs of rising tensions in the Middle East could boost a safe-haven currency such as the US Dollar (USD) and create a headwind for the pair in the near term.
Data released by China’s National Bureau of Statistics (NBS) on Sunday showed that the official Manufacturing PMI declined to 50.0 in May from 50.3 in April. The reading came in line with the market expectations of 50.0. Additionally, the NBS Non-Manufacturing PMI rose to 50.1 in May, compared to 49.4 in April.
The market forecast was for a 49.5 print.
Traders brace for China’s RatingDog Manufacturing PMI report for May, which is due on Monday. If the report shows a stronger-than-expected outcome, this could lift the Aussie against 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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