AUD/USD gives of intraday gains, Aussie/US inflation in focus
- AUD/USD gives up a majority of intraday gains while the US Dollar remains on the backfoot.
- The US Dollar weakened as US Trump nominated veteran hedge-fund manager Bessent as Treasury Secretary.
- Investors await the monthly Aussie inflation data for fresh RBA interest rate guidance.
The AUD/USD pair surrenders a majority of its intraday gains after facing selling pressure near the intraday high of 0.6550 in Monday’s North American session. The Aussie pair drops even though the US Dollar (USD) wobbles near the intraday low, suggesting that the Australian Dollar (AUD) is also performing weakly.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects to near 106.80 after posting a fresh two-year high of 108.00 on Friday.
The Greenback had a negative start at the open on Monday as President-elect Donald Trump chose hedge-fund manager Scott Bessent as Treasury Secretary. The market reaction to the news appeared positive for risky assets while the US Dollar and bond yields were hit badly.
However, analysts at MUFG commented that Monday's dollar depreciation is a temporary correction after Friday's steep gains. Bessent has indicated "a possible more balanced approach" to trade tariffs. However, this won't change prospects of the United States (US) economy performing much better than others.
This week investors will focus on the US Personal Consumption Expenditure Price Index (PCE) data for October to get fresh interest rate guidance, which will be published on Wednesday. Investors will pay close attention to the core PCE inflation data, a Federal Reserve’s (Fed) preferred inflation gauge, which is estimated to have grown by 2.8%, faster than 2.7% in September.
Meanwhile, the Australian Dollar (AUD) will be guided by the monthly Consumer Price Index (CPI) data for October, which will be published on Wednesday. Economists estimate the inflation data to have risen at a faster pace of 2.3% from 2.1% in September. The inflation data will significantly influence market expectations for Reserve Bank of Australia (RBA) interest rate path. Currently, the RBA is expected to leave its Official Cash Rate (OCR) unchanged at 4.35% by the year-end.
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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