Australian Dollar edges lower below 0.7050 as US PPI lifts US Dollar
- AUD/USD weakens to near 0.7030 in Friday’s Asian session.
- The US PPI inflation posted the largest annual gain in three and a half years.
- The RBA will announce its next interest rate decision next week, with no change in rate expected.
The AUD/USD pair loses momentum to around 0.7030 during the Asian trading hours on Friday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) after US wholesale prices rose more than expected in May. The preliminary reading of the Michigan Consumer Sentiment Index for June will be published later in the day.
US producer prices increased more than expected in May, leading to the highest level since November 2022, the US Bureau of Labor Statistics showed on Thursday. The US Producer Price Index (PPI) climbed 6.5% YoY in May, compared to 5.7% in April, hotter than the market expectation of 6.4%. Meanwhile, the PPI rose by 1.1% MoM in May, above the market consensus of 0.7%.
This report provided more evidence that inflation pressures were building up as the Middle East conflict boosted the cost of energy products. Markets are now pricing in a 43% probability of a quarter-point rate hike in December, up from just about 14% a month ago, according to the CME FedWatch tool.
The Reserve Bank of Australia (RBA) will announce its next interest rate decision next Tuesday. Fading expectations of additional interest rate hikes by the Australian central bank might weigh on the Aussie. All four of Australia's Big Four banks expected the RBA to keep rates on hold at its upcoming meeting, with Westpac forecasting a 25-basis-point increase in August.
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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