The Australian dollar has spent this week as a passenger in someone else’s trade. A hawkish Federal Open Market Committee (FOMC) and a rising US dollar dragged the Australian currency down to the 0.7000 level, with the pair’s keen decline in mid-week due more to events in Washington than anything outside Canberra. However, the Australian is not as pure a risk indicator as he is usually thought of. This brings with it its own problem of domestic inflation; next week will be a scarce opportunity to trade based on this currency rather than dollar dynamics.
The RBA is not done with its hawkish approach
The Reserve Bank of Australia (RBA) left the interest rate unchanged at 4.35% this month, although it adopted a far from dovish tone. Policymakers have signaled that inflation remains elevated and has increased significantly, partly due to higher fuel and commodity prices linked to the conflict in the Middle East, the effects of which are already becoming perceptible. Several positions still see room for additional monetary tightening before any monetary easing cycle begins. the central bank’s own projections keep inflation above target until 2027. This is much stronger fundamentals than most of Australia’s competitors can claim.
Why carry can’t catch the deal
None of this was enough to lift the currency because the Australian is not only responsible for its own rate history. It is being traded as a floating proxy for both risk appetite and China, which has not helped: a stronger dollar dampens risk sentiment, while frail Chinese demand and a enormous iron ore market limit the rebound in Australian trading conditions. The result is a currency with real domestic inflationary pressure that still cannot break away from the 0.7000 level. As long as the dollar owns the tape, the better fundamentals of the Australian remain academic.
Two home prints, then a dollar
Next week finally gives the Australian the opportunity to trade domestically. Australia’s monthly Consumer Price Index (CPI) for May will be released at 01:30 GMT on Wednesday, with the annual rate rising to 4.3% and the focus being on the trimmed average, the RBA’s preferred main measure; a sizzling reading would revive bets on price hikes and give the currency a really specific reason to strengthen, even against a robust dollar.
The May jobs report will be released at the same time Thursday, following an unexpected decline in employment the previous month; a rebound would strengthen the hawkish view. A complication is timing: the job printing comes on the same day that the United States releases its third estimate of first-quarter gross domestic product (GDP) and the May Consumer Expenditures Price Index (PCE) at 12:30 GMT. Australia’s emphatic double-header in a hotly contested American PCE will see the Aussie pulled in both directions; the dollar leg usually wins this tug of war.
Resistance: The first obstacle is the 0.7050 level, with the 50-day exponential moving average (EMA) near 0.7100 limiting a broader pullback; The Australian needs a close above 0.7100 to consider the decline is over.
Support: The line that matters is the 0.7000 handle; this has been the case so far. A sustained break will expose the 0.6950 level, followed by the 200-day EMA near 0.6900.
Deviation: Neutral to bearish while the price is below 0.7100 and the dollar dominates, but with a clear two-way risk next week. Daily Stochastic Relative Strength Index (Stoch RSI) Near Oversold Leaves Room for a Bounce; The catalyst most likely to trigger it is the sizzling Australian CPI. A cushioned CPI turning into a robust US PCE takes the pair back through 0.7000 towards 0.6950.
AUD/USD Hourly Chart
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 unthreatening 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 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 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.
