AUD/USD extends upside to near 0.6500 amid weaker US Dollar
- AUD/USD gains ground to around 0.6500 in Monday’s early Asian session.
- The ongoing “sell America” trend weighs on the US dollar broadly.
- RBA dovish rate cuts might cap the upside for the pair.
The AUD/USD pair extends the rally to around 0.6500 during the early Asian session on Monday. The persistent trade war fears and the ongoing “sell America” trend drag the US dollar (USD) lower and provide some support to the pair. US markets are closed due to the Memorial Day holiday on Monday.
Fed officials have said in recent weeks that they will keep rates on hold due to lingering uncertainty over US President Donald Trump’s tariff policies. Chicago Federal Reserve (Fed) President Austan Goolsbee noted on Friday that Trump’s latest tariff threats have complicated policy and likely put off changes to interest rates. Meanwhile, Kansas City Fed President Jeffrey Schmid said that the officials will lean on hard data in making interest rate decisions and the Fed needs to be careful how much emphasis it puts on soft data.
According to the CME FedWatch tool, markets have priced in nearly a 71% chance that the Fed will keep its interest rates steady through its next two meetings. Analysts expect the US central bank to cut twice this year, with the next move not happening until September.
The renewed trade tensions and growing concerns around the US fiscal outlook continue to undermine the Greenback against the Aussie. The USD struggled to gain ground since Moody’s downgraded the US credit rating from Aaa to Aa1. This move aligns with similar downgrades by Fitch Ratings in 2023 and Standard & Poor’s in 2011.
On the other hand, the Reserve Bank of Australia’s (RBA) dovish rate cuts might cap the upside for the Australian Dollar (AUD). The RBA decided to lower its cash rate from 4.15% to 3.85% last week, as widely expected. However, the Australian central bank expressed concern about the impact of tariffs on Australia's economy. The RBA will closely monitor Trump's tariff policy, especially with China, as China is a major trading partner of Australia.
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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