AUD/USD pares Friday’s losses and returns above 0.6500 as risk aversion ebbs
- The Aussie Dollar regains lost ground on a brighter market mood and the US Dollar's weakness.
- Easing concerns about an escalation of the Middle East war is boosting risk-related currencies.
- Mixed data from China failed to provide any significant support to the AUD.
The Australian Dollar is one of the stronger performers on Monday, favoured by an improving market sentiment and a weaker US Dollar. The pair is rallying about 0.45% so far today, returning to levels past 0.6500 as fears about the Middle East conflict ease.
Iran and Israel have continued shelling each other for the fourth consecutive day, but fears that the conflict might escalate into a regional war have eased, and, so far, Iran has not threatened to block the Strait of Hormuz. This is a key gateway for oil traffic, and its closure might draw the US into the war.
The comments from Iran’s Foreign Ministry announcing that the parliament is preparing a bill to leave the nuclear Non-Proliferation Treaty have not offset the moderately positive market sentiment.
Several countries have offered themselves to mediate in the conflict, including China and Russia, and Trump is pushing both countries to reach a deal, which feeds hopes that a peace agreement is possible.
On the macroeconomic front, data from China has been mixed. The higher-than-expected CPI revealed that consumption is picking up in Australia’s main trading partner, and that is positive for the Aussie. Industrial production, however, slowed down beyond expectation, suggesting that the Chinese economy is not out of the woods yet.
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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