AUD/USD reverses earlier gains on Friday as stronger-than-expected US non-farm payrolls (NFP) data supports the US dollar (USD), putting slight pressure on the Australian dollar (AUD), while price action remains subdued due to low liquidity due to the Good Friday holiday.
At the time of writing, AUD/USD is trading around 0.6900, having hit an intraday high of 0.6916. Meanwhile, the US Dollar Index (DXY), which tracks the value of the dollar against a basket of six major currencies, is consolidating gains above the 100 level.
According to data published by the US Bureau of Labor Statistics, in March the American economy created 178,000 jobs. jobs, significantly exceeding expectations of 60,000. It is worth noting that the data for February was revised downwards and showed a loss of 133,000. jobs compared to the previously recorded decrease of 92 thousand. The unemployment rate fell to 4.3% from 4.4%.
Despite the forceful headline, softer wage growth provided a more balanced picture. Average hourly earnings increased by 0.2% m/m in March, below the forecast of 0.3% and decreased from the previous level of 0.4%. Year-over-year, earnings rose 3.5%, beating expectations of 3.7% and slowing from 3.8%.
The data reinforced expectations that the Federal Reserve (Fed) will remain patient before making any interest rate cuts as lingering oil-led inflation risks continue to cloud the policy outlook. This has led investors to reduce expectations of interest rate cuts and increasingly hold prices for the longer term, with markets now expecting rates to remain unchanged through 2026, according to the CME FedWatch Tool.
Elsewhere, investors also looked at the latest data from China’s National Bureau of Statistics, released earlier on Friday, which showed the manufacturing purchasing managers’ index (PMI) rose to 50.4 in March, up from 49 earlier and above expectations of 50.1. Australia’s economy is closely linked to China, its largest trading partner, making the Australian dollar sensitive to changes in Chinese economic activity.
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 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 operate 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 quick 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.
