AUD/USD slides to near 0.6200 as Trump proposes additional 10% tariffs on China
- AUD/USD refreshes three-week low near 0.6200 as US President Trump threatens to impose additional 10% tariffs on China.
- RBA Hauser supports keeping interest rates steady until he sees more progress in the disinflation trend toward the 2% target.
- Investors await the US PCE inflation as it will influence the Fed’s monetary policy outlook.
The AUD/USD pair posts a fresh three-week low near 0.6200 in European trading session after extending its losing streak for the sixth trading day on Friday. The Aussie pair was already facing pressure the entire week but sensed more pressure after United States (US) President Donald Trump threatened to impose additional 10% tariffs on China on Thursday.
US President Trump said in a tweet from his Truth.Social account that he will slap an additional 10% levy on China due to continuous flows of drugs into the economy through the borders of Canada and Mexico. Trump also confirmed that the 25% tariffs proposed for Canada and Mexico are coming into effect on March 4.
Additional import duties from the US are expected to further weigh on Chinese economic growth. Donald Trump also imposed 10% tariffs on China earlier this month. The Australian economy relies heavily on exports to China, and higher import duties by the US on the world’s second-largest economy make its products less competitive. Therefore, Trump’s tariffs have indirectly impacted the Australian Dollar (AUD), which is vulnerable to policies that weigh on demand for Chinese products.
On the monetary policy front, the Reserve Bank of Australia (RBA) is unlikely to cut interest rates again soon. RBA Deputy Governor Andrew Hauser said on Thursday that he wants to see more “positive inflation data” before considering further rate cuts.
On the US Dollar (USD) front, investors await the United States (US) Personal Consumption Expenditure Price Index (PCE) data for January, which will be published at 13:30 GMT. Investors will pay close attention to the core PCE inflation data as it is the Federal Reserve’s (Fed) preferred inflation gauge. The inflation data will influence market expectations for the Fed’s monetary policy outlook.
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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