The Australian dollar (AUD) remains flat against the US dollar (USD) on Friday as the US dollar reverses earlier gains despite stronger-than-expected US Producer Price Index (PPI) data. At the time of writing, the AUD/USD rate is trading around 0.7112 and is on track to rise for the eighth consecutive week.
The headline PPI increased by 0.5% m/m, exceeding the forecast of 0.3%, while December data was revised down to 0.4% from 0.5%. On a year-over-year basis, PPI rose 2.9%, above expectations of 2.6%, although slightly below the previous reading of 3%.
Core PPI, which excludes food and energy, rose 0.8% m/m, well above estimates of 0.3% and accelerating from December’s revised 0.6% gain. On an annual basis, core producer inflation rose to 3.6% from 3.3%.
The data confirms what Federal Reserve (Fed) officials have been signaling in recent weeks, that inflation pressures remain unchanged and progress toward the 2% target is uneven. In particular, the stronger database reading supports the case for keeping monetary policy tight for longer, even as markets continue to debate the timing of interest rate cuts.
According to the CME FedWatch Tool, markets widely expect the Fed to leave interest rates unchanged at its March and April meetings. The likelihood of a June rate cut has declined, with July now seen as the preferred time for the Fed to resume easing later this year.
Changing expectations for interest rate cuts could lend a hand limit deeper losses for the US dollar. However, a significant recovery may remain unlikely as renewed uncertainty over US trade policy continues to weigh on overall market sentiment.
In addition to the broad weakening of the US dollar, the Australian currency continues to be well supported by the Reserve Bank of Australia’s hawkish expectations as inflation remains above the RBA’s target range of 2-3%.
While the Council may pause in March to assess the impact of February’s augment, markets and major banks including CBA, Westpac, ANZ and NAB expect another 25 basis point augment at their May meeting, which would take the cash rate to 4.10%.
Attention now turns to Australia’s TD-MI inflation index, which is due to be released on Monday. In the United States, investors will also be awaiting the release of the Manufacturing Purchasing Managers’ Index (PMI).
Australian Dollar FAQs
One of the most critical 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 safe and sound 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 utilize 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 brisk 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.
