AUD/USD holds gains above 0.6800 as Fed sequential large rate cut bets rise
- AUD/USD grips gains above 0.6800 as investors see one more large Fed interest rate cut.
- Investors await Fed Harker’s speech for fresh guidance on interest rates.
- The RBA is unlikely to cut interest rates this year.
The AUD/USD pair clings to gains above the round-level support of 0.6800 in Friday’s European session. The Aussie asset remains broadly firm amid growing speculation that the Federal Reserve (Fed) could deliver one more bumper interest rate cut in its monetary policy meeting in November.
The Fed pivoted to policy normalization on Wednesday when he announced a 50 basis points (bps) rate cut decision, pushing interest rates to 4.75%-5.00%. The signal was clear that the Fed is focused in preventing further deterioration in the labor market conditions. On the interest rate guidance, the Fed dot plot shows that policymakers see the federal fund rate heading to 4.4% by the year-end, which indicates the central bank will cut rates further by at least 25 basis bps.
However, traders see a 75-bps decline in the remaining two policy meetings in November and December, in which one interest rate decision would be a 50-bps rate cut. According to the CME FedWatch tool, the likelihood of the Fed reducing interest rates by 50 bps to 4.25%-4.50% in November is 43%, higher than the 37% recorded on Thursday.
In today’s session, investors will keenly focus on the speech from Philadelphia Fed Bank President Patrick Harker’s speech at 18:00 GMT for fresh interest rate guidance.
In the Asia-Pacific region, the Australian Dollar (AUD) remains firm as upbeat Aussie Employment data weigh on market expectations for the Reserve Bank of Australia (RBA) to start reducing interest rates this year. The Australian Employment report for August showed that employers hired 47.5K fresh workers, higher than estimates of 25K but almost similar to the prior release of 48.9K, downwardly revised from 58.2K.
Meanwhile, the Australian Dollar didn’t react much to People’s Bank of China’s (PBoC) interest rate decision announced in the Asian session in which the central bank left its one-year and five-year Loan Prime Rates (LPRs) unchanged at 3.35% and 3.85%, respectively, as expected. Historically, any economic development in China influences the Australian Dollar significantly being close trading partners.
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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