Australian Dollar hits fresh four-month highs amid USD weakness, strong Chinese inflation
- AUD/USD crawls higher and hits a 0.7237 high, despite risk-averse markets.
- The US Dollar remains on its back foot with all eyes on Friday's US CPI data
- Middle East tensions and the Oil rally are likely to limit Aussie rallies.
The Australian Dollar (AUD) resumed its uptrend on Wednesday, with the US Dollar (USD) losing ground against its main peers despite the dismal market mood, while the rebound in Chinese inflation eased concerns about domestic demand. The AUD/USD pair hit fresh four-month highs at 0.7237, but returned to previous ranges, around 0.7220 shortly afterwards.
The Aussie Dollar is drawing support from a weak Greenback, which keeps trading lower across the board, with markets awaiting the release of US Consumer Price Index (CPI) figures on Friday.
Economists at DBS underline that “this week’s CPI data will prove pivotal for the FOMC meeting next week,” arguing that the inflation print could determine whether policymakers move again in September. They note that “firm labour market data kept Fed hike bets elevated (60% chance of a hike in September) but was not sufficient to decisively nudge investors firmly in one direction,” leaving markets finely balanced ahead of the release.
Middle East tensions, Oil prices likely to cap Aussie's rallies
Aussie rallies, however, are likely to remain limited, as the escalating hostilities in the Middle East and rallying Oil prices keep weighing on investors' sentiment. Iran launched an attack on a US Navy warship and an airbase in Jordan on Tuesday, and the US responded by hitting Iranian Oil tankers in the Strait of Hormuz. Apart from that, the Iran-backed Houthi militias attacked Oil facilities in Saudi Arabia, which risks leading the country into a regional war.
Earlier in the day, CPI data from China provided some support to the AUD as it eased market concerns about weak domestic demand in a key Australian trade partner. Consumer inflation bounced up to 0.4% in August, following a 0.1% contraction in July and beating expectations of a 0.3% increase. Year-over-year, the CPI accelerated to 0.8% from 0.5% in the previous month, in line with market expectations.
Australia, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser called for more action on inflation on Tuesday, which, according to Rabobank analysts, “has markets thinking of hikes this month and in November.” This prospective tightening is “very much what the US Treasury would like to see – plus a lot more action on non-housing parts of the economy,” say Rabobank experts in a note, underscoring how a more restrictive RBA stance dovetails with US policy preferences and supports a firmer near-term outlook for the Aussie.
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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