AUD/USD deepens its losses for the second session in a row, reaching a level of around 0.7110 on Friday during Asian hours. However, the downside for this pair may be confined as the Australian Dollar (AUD) may strengthen amid cautious sentiment on the Reserve Bank of Australia’s (RBA) policy outlook.
Traders widely expect the RBA to leave the interest rate unchanged at 3.85% at its March meeting because policymakers won’t receive the full first-quarter inflation report until behind schedule April. RBA Governor Michele Bullock also stressed that a patient approach remains appropriate when the economy is operating near balance, dampening expectations for an aggressive tightening cycle.
Australia’s worse-than-expected January inflation reading has reinforced expectations that the RBA could hike interest rates again in May. Markets are pricing in an additional tightening of monetary policy this year of around 40 basis points, although many analysts believe the final interest rate will peak near 4.10%, close to the highest level reached during the post-pandemic inflation surge.
Meanwhile, the AUD/USD pair could find support as the US dollar (USD) struggles amid continued uncertainty over US trade policy. Traders are eagerly awaiting the release of the January US Producer Price Index (PPI) on Friday for fresh guidance from the Federal Reserve (Fed).
US President Donald Trump has announced plans to impose a blanket 15% tariff on imports following a Supreme Court decision that invalidated his previous reciprocal tariff framework. However, US Trade Representative Jamieson Greer indicated that tariffs for several countries could be raised to 15% or more in the coming days.
Australian Dollar FAQs
One of the most crucial 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 raising or lowering interest rates. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low ones. The RBA may also exploit 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 speedy 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.
