AUD/USD bounces back to near 0.6400 as US Dollar’s recovery fizzle out
- AUD/USD recovers sharply to near 0.6400 at the expense of the US Dollar.
- Washington has signaled its willingness to negotiate a trade deal with China.
- The RBA is expected to cut interest rates next month.
The AUD/USD pair rebounds to near 0.6390 during European trading hours on Thursday. The Aussie pair recovers as the two-day recovery in the US Dollar (USD) has fizzled out despite ebbing fears of an intense trade war between the United States (US) and China.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, retreats to near 99.20 from Wednesday’s high around 100.00.
US President Donald Trump has expressed a willingness to make a trade deal with China. “Discussions with Beijing are going well, and I think that we will reach a deal,” Trump said on Tuesday. Hopes of a de-escalation in the tariff war between the world’s two largest powerhouses have improved further as US Treasury Secretary Scott Bessent has shown openness to lower tariffs. “I don’t think either side believes that the current tariff levels are sustainable, so I would not be surprised if they went down in a mutual way,” Bessent said.
Meanwhile, fears of a resurgence in US inflation have escalated as the flash S&P Global Purchasing Managers’ Index (PMI) report showed that respondents have signaled passing the impact of tariffs on consumers. Such an event will limit the Federal Reserve’s (Fed) capability of reducing interest rates.
Easing tensions between Washington and China is also a favorable scenario for the Australian Dollar (AUD), given the significant dependence of the Australian economy on its exports to China.
Domestically, increasing odds of an interest rate cut by the Reserve Bank of Australia (RBA) in the May policy meeting could weigh on the Aussie Dollar. According to analysts at Westpac, the RBA will reduce its Official Cash Rate (OCR) by 25 basis points (bps) to 3.85% in May amid growing downside risks to inflation and global economic growth.
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.
Recommended Articles
