Australian Dollar declines as US Dollar gains amid rising Treasury yields
- AUD/USD falls as the US Dollar rises amid Treasury yields climbing back toward multi-decade highs.
- FOMC September Meeting Minutes showed expectations of another increase before year-end.
- Australia’s Consumer Inflation Expectations climbed to a four-month peak of 5.3% in October, up from 4.9%.
AUD/USD extends its losses for the second successive day, trading around 0.6950 during the European hours on Thursday. The pair loses ground as the US Dollar (USD) gains support amid Treasury yields climbing back toward multi-decade highs not witnessed since 2002.
US yields on 10-year and 30-year Treasury notes traded near 5.32% and 5.71%, respectively. This sharp move in bond yields, combined with the Federal Open Market Committee's (FOMC) hawkish tone regarding persistent inflation risks, weighed heavily on overall investor sentiment.
Moreover, the Federal Reserve’s September Meeting Minutes revealed unanimous support among all 19 policymakers for the recent interest rate hike, with a majority agreeing that an additional rate increase may be required before the end of the year. Although market consensus points toward rates holding steady at the October meeting, traders utilizing the CME FedWatch tool are pricing in 84.2% probability of rate hikes in December.
Safe-haven demand lifts the Greenback as geopolitical tensions remain high over a potential escalation between the US and Iran, which poses an ongoing threat to vital maritime shipping routes through the Strait of Hormuz. Elevated crude oil prices continue to stoke inflation fears.
Australia’s Consumer Inflation Expectations rose to a four-month peak of 5.3% in October, from 4.9% prior. This highlights ongoing price pressures driven by high global energy costs despite the Reserve Bank of Australia's (RBA) continued monetary tightening. Consequently, money markets are now pricing in a 27% probability of another interest rate hike to 4.85% at the upcoming RBA Board meeting, according to the ASX Rate Tracker.
UOB shifts to neutral on Aussie, sees range-bound trade ahead
Strategists at UOB Group note that their medium-term stance on AUD has recently been recalibrated. “We turned negative on AUD in the middle of last month,” they recall, but add that as of yesterday (07 Oct, spot at 0.6980) they “revised our view to neutral, and we indicated that AUD ‘is likely to trade between 0.6935 and 0.7020.’” They stress that “there is no change in our view,” reinforcing the expectation of range-bound price action over the next one to three weeks.
Technical Analysis:
In the daily chart, AUD/USD trades at 0.6950, extending a bearish near-term bias as it holds below both the nine- and 50-period Exponential Moving Averages (EMAs). The short-term EMA sits under the longer one, but both remain above spot, hinting at a capped recovery structure after the recent slide. The 14-day Relative Strength Index (RSI) around 34 suggests lingering bearish pressure and proximity to oversold territory, while the latest FXS Fed Sentiment Index reading at 137.9 adds a cautious macro backdrop that could keep rallies in the pair subdued.
On the topside, immediate resistance is located at the nine-period EMA at 0.6979, with a more significant barrier at the 50-period EMA near 0.7058, where selling interest would likely re-emerge if the pair attempts a rebound. On the downside, initial structural support is seen at the horizontal level of 0.6688, ahead of deeper floors at 0.6434 and 0.6348, which mark prior demand zones and would come into view on a continuation of the current decline.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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