AUD/USD declines toward 0.6500 on China’s economic woes
- AUD/USD continues its losing spell for the ninth trading session.
- Weak Chinese and Australian economic outlook have dampened the Australian Dollar.
- Investors await the US Q2 GDP data to know the current status of the economy’s health.
The AUD/USD pair extends its losing streak for the ninth trading session on Thursday. The Aussie asset plummets to near 0.6520 and is expected to slide further to the psychological support of 0.6500. The appeal of the Australian Dollar (AUD) has worsened due to deepening worries about China’s economic prospects and its consequences on Australia.
Concerns over China’s economic outlook grew after market experts conveyed that the outcome of Third Plenum lacks strong liquidity measures to boost growth and the People’s Bank of China (PBoC) cuts its short-and long-term Loan Prime Rate (LPR) surprisingly by 10 basis points (bps). An unexpected rate cut decision by the PBoC appeared to be the outcome of slower-than-expected Gross Domestic Product (GDP) growth in the second quarter of this year.
Being a liquid proxy to China’s economy, the Australian Dollar has been hit badly. The lack of meaningful triggers for China’s growth has weighed heavily on base metals. Global iron ore prices have plunged to their lowest in three weeks. Foreign flows in the Australian economy are expected to decline sharply, being responsible for exporting more than 50% of global iron ore demand.
Meanwhile, dismal market sentiment ahead of the United States (US) Q2 flash GDP has weighed on the Australian Dollar. S&P 500 futures post nominal losses in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines but holds the key support of 104.00.
The US economy is estimated to have expanded at a robust pace of 2.0% from the former release of 1.4% on an annualized basis. While GDP Price Index, a key measure of changes in prices of goods and services produced, appears to have decelerated to 3.6% from 3.1%. This would prompt expectations of early rate cuts by the Federal Reserve (Fed).
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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