Australian Dollar holds strong due to RBA rate hike bets
- AUD/USD holds strong on rising RBA rate hike expectations despite weak capital expenditure data.
- Hotter July inflation prompted major banks to forecast an RBA cash rate increase to 4.6% soon.
- A firm US Dollar, backed by solid PCE inflation data, caps upside potential for the pair.
AUD/USD extends its gains for the third successive day, trading around 0.7180 during the Asian hours on Thursday. The pair continues to trade with a bullish bias as the Australian Dollar (AUD) maintains its strength, showing resilience despite domestic Private Capital Expenditure falling 3.6% in the second quarter, sharply missing expectations of a flat reading after a previous 6.5% gain.
This underlying AUD strength is primarily driven by heightened expectations of an upcoming Reserve Bank of Australia (RBA) interest rate hike, catalyzed by a hotter-than-expected July inflation report that signaled persistent price pressures. These elevated inflation figures have forced major financial institutions to revise their RBA rate path forecasts upward.
National Australia Bank (NAB) now anticipates a rate increase to 4.6% at the September meeting, whereas Commonwealth Bank and ANZ project a move in November while acknowledging the distinct risk of an earlier action. Although the RBA held its cash rate steady at 4.35% in August following three previous hikes, policymakers explicitly warned that further monetary tightening remains on the table if inflationary risks escalate.
Australia leading index points to a soft, not weak, growth backdrop
BNY Mellon’s Geoff Yu notes that Australia’s Westpac–Melbourne Institute Leading Index showed a modest improvement in July, with the six‑month annualised growth rate rising to “-0.2% from -0.4% in June.” He points out that the index “remains below trend for a seventh straight month,” but stresses that the signal is now “only marginally negative,” indicating an economy that is “soft rather than outright weak.” This nuanced reading of the data reinforces the view that underlying momentum has cooled without tipping into clear-cut weakness.
However, upside potential for the pair may be capped by steady performance from the US Dollar (USD). Stronger-than-expected US economic data has reinforced market expectations that the Federal Reserve (Fed) will implement another interest rate hike before the year concludes. July's PCE price index accelerated to 0.2% month-on-month, beating the 0.1% forecast, while the annual rate ticked up to 3.7%. Investors are now turning their focus to Fed leadership for clearer policy cues at the upcoming Jackson Hole symposium.
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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