AUD/USD remains depressed below YTD peak, around 0.6565 ahead of US ADP report
- AUD/USD retreats from YTD peak amid a modest USD recovery from a multi-year low.
- Fed rate cut bets and a positive risk tone might cap the USD and support the Aussie.
- Traders look to the US ADP report for some impetus ahead of the US NFP on Thursday.
The AUD/USD pair attracts some sellers on Wednesday and moves away from a fresh year-to-date high, around the 0.6590 area touched the previous day. Spot prices remain depressed near the 0.6565-0.6560 region through the first half of the European session, though the downside potential seems limited.
The Australian Dollar (USD) is weighed down by unimpressive domestic data, which reaffirmed bets that the Reserve Bank of Australia (RBA) will cut interest rates again in July. The Australian Bureau of Statistics (ABS) reported that Retail Sales grew 0.2% MoM in May compared to 0% in April, though it fell short of estimates for a 0.4% rise. Adding to this, a modest US Dollar (USD) strength turns out to be another factor exerting downward pressure on the AUD/USD pair.
Any meaningful USD recovery from a multi-year low touched on Tuesday, however, still seems elusive amid the growing acceptance that the Federal Reserve (Fed) will resume its rate-cutting cycle in the near future. In fact, traders see a small chance that the next rate reduction by the Fed will come in July and are pricing in over a 75% probability of a rate cut at the September policy meeting. This could act as a headwind for the buck and help limit losses for the AUD/USD pair.
Traders might also refrain from placing aggressive bets and opt to wait for the release of the US Nonfarm Payrolls (NFP) report on Thursday. The crucial data will influence market expectations about the Fed's rate-cut path, which, in turn, will drive the USD demand and provide a fresh impetus to the AUD/USD pair. In the meantime, the US ADP report on private-sector employment will be looked at for short-term opportunities later during the North American session this Wednesday.
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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