AUD/USD falls back from 0.6400 as US Dollar bounces back
- AUD/USD retreats from 0.6400 as the US Dollar recovers its intraday losses.
- Investors digest weak preliminary US S&P Global PMI data for February.
- Going forward, Australian monthly CPI data for January will influence RBA’s policy outlook.
The AUD/USD pair pares gains after rising to near 0.6400 in late European trading hours on Monday. The Aussie pair falls back as the US Dollar (USD) bounces back strongly, with investors shrugging off the impact of weak United States (US) flash S&P Global Purchasing Managers’ Index (PMI) data for February, which was released on Friday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers its entire intraday losses and returns above 106.50.
The PMI report showed that the overall business activity continued to expand, however, the pace of expansion slowed significantly, with the Services PMI declining for the first time in 25 months. The Services PMI, which gauges activities in the services sector, contracts to 49.7 from 52.9 in January. On the contrary, the Manufacturing PMI rose at a faster-than-expected pace to 51.6.
Meanwhile, investors seek more developments on US President Donald Trump’s tariff agenda to get cues about the likely global economic outlook. Last week, Trump announced that he is planning to impose 25% tariffs on cars, pharmaceuticals, semiconductors, and lumber and forest products over the next month or sooner. Such a scenario would lead to a global trade war, which would increase demand for safe-haven assets.
In the Asia-Pacific region, the Australian Dollar (AUD) trades cautiously as investors await the monthly Consumer Price Index (CPI) data for January, which will be released on Wednesday. The monthly CPI is estimated to have accelerated to 2.6% from 2.5% in December. The inflation data will influence market speculation for the Reserve Bank of Australia's (RBA) monetary policy outlook.
Last week, the RBA reduced its Official Cash Rate (OCR) for the first time since November 2020 but said that the battle against inflation is not over yet and guided a cautious stance on further monetary policy easing.
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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