AUD/USD slumps to near 0.6550 as Trump trades swell, US inflation in focus
- AUD/USD stumbles to near 0.6550 as the US Dollar extends its rally on so-called ‘Trump trades’.
- Investors await the US inflation data for October, which will be published on Wednesday.
- The RBA is expected to maintain its interest rates at its current levels by the year-end.
The AUD/USD pair falls sharply to near 0.6550 in North American trading hours on Tuesday. The Aussie pair weakens as traders ramp up their bets in those assets that are expected to perform better in US President-elected Donald Trump’s administration. The US Dollar (USD) has been one of the key beneficiaries of so-called ‘Trump trades’ as Trump’s policies are expected to boost United States (US) economic growth.
Trump vowed that he would raise import tariffs by 10% universally and lower corporate taxes in his election campaign, a scenario that will boost demand for domestically-produced goods and services, labor demand, and business investment.
The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, climbs to near 105.90, the highest level seen in more than four months.
Meanwhile, investors shift focus to the US Consumer Price Index (CPI) data for October, which will be published on Wednesday. Economists expect the headline inflation to have accelerated to 2.6% from 2.4% in September, with core CPI – which excludes volatile food and energy prices – rising steadily by 3.3%.
The Australian Dollar (AUD) underperforms on Tuesday even though the Reserve Bank of Australia (RBA) is not expected to cut its Official Cash Rate (OCR) in the near term. The RBA is more focused on diminishing upside risks to inflationary pressures, with officials remaining confident over stability in the labor market.
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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