AUD/USD softens to near 0.6500 ahead of Australian Retail Sales data
- AUD/USD attracts some sellers to around 0.6510 in Monday’s early Asian session, down 0.21% on the day.
- Trump tariff threats and the geopolitical risks weigh on the Aussie, but hawkish RBA bets might cap its downside.
- The Australian Retail Sales and the USI SM Manufacturing PMI will be the highlights on Monday.
The AUD/USD pair weakens to near 0.6510 despite the renewed US Dollar demand during the early Asian session on Monday. Investors will keep an eye on the Australian Retail Sales and the USISM Manufacturing Purchasing Managers' Index (PMI), which is due later on Monday.
The US President-elect Donald Trump flagged his intention to impose a 25% tariff on all products from Mexico and Canada and an additional 10% on goods from China, exerting some selling pressure on the China-proxy Australian Dollar (AUD) as China is the largest trading partner to Australia. Furthermore, heightened geopolitical tension and economic uncertainty could benefit the US Dollar's safe-haven status and act as a headwind for AUD/USD.
On the other hand, the hawkish remarks from the Reserve Bank of Australia (RBA) might help limit the AUD’s losses. The RBA Governor Michele Bullock said last week that “underlying inflation is still too high to be considering lowering the cash rate target in the near term."
On the USD’s front, the ISM PMI will take center stage later in the day. Manufacturing PMI is expected to improve to 47.5 in November from 46.5 in October. In case of the stronger-than-expected outcome, this could lift the Greenback against the Aussie.
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.