Australian Dollar remains stronger as CPI YoY climbs in July
- AUD strengthens after Australia's July CPI hit 3.5% YoY, beating the 3.2% forecast despite easing from June's 3.8%.
- Australia's July CPI rose 1.0% MoM, beating forecasts, while annual Trimmed Mean CPI increased 3.6%.
- Fading safe-haven demand and potential Iran-Oman Strait of Hormuz maritime corridor talks may weigh on the US Dollar.
AUD/USD extends its gains for the second consecutive day, trading around 0.7180 during the European hours on Wednesday. The pair gains ground as the Australian Dollar (AUD) gains ground after the Consumer Price Index (CPI) climbed 3.5% year-over-year (YoY) in July, compared with 3.8% growth in June. The market forecast was a 3.2% print for the reported period.
Australia’s monthly Consumer Price Index rose 1.0% in July, up from a 0.1% decrease, beating the estimated 0.8% increase. Meanwhile, the Trimmed Mean CPI increased 0.5% MoM in July. Annually, the Trimmed Mean CPI advanced 3.6% YoY during the same period.
RBA Minutes seen lifting near-term hike risks despite distant market pricing
Analysts at MUFG note that market expectations for Australian policy tightening remain subdued, with “a full rate hike in Australia not priced until Feb 2027.” However, they argue that the latest central bank communication points to a more immediate risk profile, highlighting that “the minutes from the August RBA meeting suggest the risk of another hike sooner is higher.” This divergence between market pricing and the RBA’s own signalling underpins MUFG’s view that investors may be underestimating the potential for earlier policy action.
However, the upside of the AUD/USD pair could be restrained as the US Dollar (USD) gains support ahead of the upcoming US Personal Consumption Expenditures (PCE) release, the Federal Reserve’s key inflation metric. Market participants are closely watching Fed Chair Kevin Warsh’s speech at the annual Jackson Hole symposium on Friday for clearer signals regarding a potential interest rate adjustment in September.
The Greenback may face challenges amid fading safe-haven demand. Market tension eased after reports surfaced that Iran and Oman discussed establishing a temporary joint maritime corridor in the Strait of Hormuz. With technical talks ongoing to finalize a permanent framework, the proposed corridor aims to improve strait administration, traffic management, maritime security, and real-time information sharing across the region.
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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