AUD/USD weakens below 0.6400 ahead of Australian employment data
- AUD/USD softens to around 0.6370 in Thursday’s early Asian session.
- US CPI inflation rose to 2.7% YoY in November, as expected.
- The dovish RBA bets continue to undermine the Aussie.
The AUD/USD pair remains on the defensive near 0.6370 after bouncing off a fresh year-to-date (YTD) low of 0.6336. The dovish stance by the Reserve Bank of Australia (RBA) drags the Australian Dollar (AUD) lower. Traders will closely monitor the Australian November labor market data, along with the US Producer Price Index (PPI) data, which are due later on Thursday.
Data released by the US Bureau of Labor Statistics (BLS) showed on Wednesday that the US Consumer Price Index (CPI) climbed 2.7% YoY in November, compared to 2.6% in October. On a monthly basis, the CPI rose 0.3% following the 0.2% increase seen in October. Meanwhile, the core CPI, which excludes volatile food and energy prices, rose 3.3% YoY in November versus 3.3% prior. The monthly core CPI rose 0.3% in November.
The US Dollar (USD) edges higher as US inflation data holds steady, with traders anticipating a quarter-point interest rate cut by the Federal Reserve (Fed) next week. Markets are pricing in more than a 96% possibility that the Fed will cut rates by 25 basis points (bps) next week, up from an 86% chance before the CPI data, according to CME's FedWatch Tool.
On the Aussie front, the RBA held rates steady at 4.35% in its final policy meeting in December but suggested a possible cut in February, with market bets showing a 63% chance. RBA Governor Michele Bullock noted that while upside inflation risks have eased, they persist and require ongoing vigilance. The unexpected dovish shift in its monetary policy statement weighs on the AUD against the Greenback.
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.