AUD/USD soars to near 0.6870 on China’s big-bang stimulus
- AUD/USD jumps to near 0.6870 as the Australian Dollar strengthens on multiple tailwinds.
- China’s massive stimulus announcement and RBA’s hawkish rate stance strengthen the Aussie Dollar.
- The next move in the US Dollar will be influenced by the US core PCE inflation data.
The AUD/USD pair rallies to near 0.6870 in Tuesday’s North American session. The Aussie asset gains strongly after China’s massive stimulus boost to revive household spending and real estate demand and uplift economic growth.
In a press conference on Tuesday, China’s top regulators outlined a sharp decline in key interest rates and establishment of RMB500 billion swap facility and RMB300 billion re-lending fund by the People’s Bank of China (PBoC). The announcement of the big-bang stimulus has strengthened the Australian Dollar’s (AUD) outlook, being a proxy to China’s economy.
The Australian Dollar was already outperforming on Reserve Bank of Australia’s (RBA) hawkish policy outcome in which the central bank left interest rates unchanged at 4.35% for the eighth time in a row. The RBA kept interest rates steady on upbeat labor market conditions and price pressures remaining persistent.
Meanwhile, the US Dollar (USD) faces selling pressure as investors expect that the Federal Reserve (Fed) could opt for continuing the aggressive policy-easing cycle. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 100.60.
According to a CME FedWatch tool, the likelihood for the Fed to cut interest rates by 50 bps to 4.25%-4.50% in November is close to 52% from 29% a week ago.
This week, investors will keenly focus on the US Personal Consumption Expenditure inflation (PCE) data for August, which will be published on Friday. Economists expect the core PCE price index, which is the Fed’s preferred inflation gauge, to have grown to 2.7% from 2.6% in July.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA 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. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast 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, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if 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 of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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