The Australian dollar (AUD) remains stable against its major currencies, with the rate holding steady around 0.7050 during Tuesday’s Asian session. The Australian pair is consolidating even though China’s trade balance data for May was stronger than expected.
Given that the Australian economy relies heavily on exports to Beijing, the impact of China’s trade balance data remains significant on the Australian dollar.
China’s trade balance reached $105.43 billion, higher than estimates of $92.1 billion and the previous reading of $84.82 billion. Imports increased significantly by 27.4%, although they were expected to boost moderately by 25% compared to the previous publication of 25.3%. Exports increased by 19.4% compared to expectations of 15% and the previous publication of 14.1%.
Going forward, investors will focus on China’s Consumer Price Index (CPI) data for May, which will be released on Wednesday.
Meanwhile, the US dollar (USD) is trading slightly lower as oil prices decline following the cessation of hostilities between Israel and Iran. At the time of writing, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading lower at around 99.95. The exchange of attacks between Israel and Iran stopped after US President Donald Trump called for a ceasefire.
Australian Dollar FAQs
One of the most essential factors for the Australian dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another key factor influencing price is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as Australia’s inflation, its dynamics and its trade balance. Market sentiment – whether investors take on riskier assets (risk-on) or look for secure havens (risk-off) – also matters, with positive risk for the AUD.
The Reserve Bank of Australia (RBA) influences the Australian dollar (AUD) by setting the interest rates that Australian banks can lend to each other. This affects the level of interest rates throughout the economy. The RBA’s main goal 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 ones. The RBA may also apply quantitative easing and tightening to influence lending conditions, the former being AUD negative and the latter AUD positive.
China is Australia’s largest trading partner, so the health of the Chinese economy has a major impact on the value of the Australian dollar (AUD). When the Chinese economy does well, it buys more raw materials, goods and services from Australia, increasing demand for the AUD and increasing its value. The opposite is the case when the Chinese economy is not growing as rapid 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, worth $118 billion a year in 2021 figures, with China being the main buyer. The price of iron ore can therefore influence the Australian dollar. Generally speaking, if the price of iron ore increases, the AUD also increases, as aggregate demand for the currency increases. The opposite is true when 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 for the AUD.
The trade balance, or the difference between what a country earns from exports and what it pays for imports, is another factor that can affect the value of the Australian dollar. If Australia produces a highly sought after export, then its currency will only appreciate in value as a result of the excess demand created by foreign buyers wanting to buy its exports compared to spending on import purchases. Therefore, a positive net trade balance strengthens the AUD, and the effect is opposite if the trade balance is negative.
