AUD/USD gains ground near 0.6700 on upbeat Australian job demand
- AUD/USD finds interim support near 0.6700 on surprisingly upbeat Australian job growth.
- Upbear Australian labor demand has prompted prospects of RBA’s further policy tightening.
- US bond yields bounce back despite firm Fed rate-cut prospects.
The AUD/USD pair manages to gain firm-footing near the round-level support of 0.6700 in Thursday’s European session. The Aussie asset discovers buying interest as signs of strong job demand from Australia’s Employment data for June has improved expectations of further policy-tightening by the Reserve Bank of Australia (RBA).
The Australian Bureau of Statistics reported that number of individuals hired in June surprisingly rose to 50.2K. Economists expected fresh payrolls at 20K against the prior release of 39.5K, downwardly revised from 39.7K. However, the Unemployment Rate rose to 4.1% from the estimates and the former release of 4.0%.
Meanwhile, the US Dollar (USD) witnesses some buying as US bond yields bounce back. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gains ground neat four-month low at 103.70. 10-year US Treasury yields recover to near 4.19%.
US bond yields bounce back even though the Federal Reserve (Fed) is widely expected to start reducing interest rates from the September meeting. The Fed is also expected to cut interest rates twice this year against once signalled by officials in the latest dot plot.
Strong expectations for Fed rate cuts have been prompted by easing price pressures. The United States (US) core Consumer Price Index (CPI), which excludes volatile food and energy items, decelerated for straight third month in June.
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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