Australian Dollar declines amid US Dollar rally ahead of labor data
- AUD/USD plummets as US Dollar strengthens on upbeat data and economic sentiment.
- Australia's central bank maintains neutral stance, hinting at potential rate cut in May 2025.
- Mixed confidence indicators and upcoming economic data keep AUD/USD under scrutiny.
The AUD/USD plunged in Tuesday's session, declining by 0.66% to 0.6535. The Australian Dollar's weakness stemmed from a strengthening US Dollar. Despite maintaining a neutral stance, Australia's central bank hinted at a possible rate cut in May 2025, and that delay might keep the Aussie afloat.
The AUD/USD weakened due to US Dollar strength, bolstered by Republican election wins and positive US data. Australia's employment report to be released later this week is expected to influence the RBA's December policy decision and its next steps.
Daily digest market movers: Australian Dollar declines due to strength in US Dollar
- The US Dollar's strength pushed the US Dollar Index (DXY) to new four-month highs, negatively impacting risk-related currencies.
- The AUD fell significantly, dropping below the 0.6600 mark and its 200-day SMA at 0.6629, indicating a potential for further declines.
- The Reserve Bank of Australia (RBA) maintained interest rates at 4.35%, with Governor Michele Bullock suggesting current levels are appropriate.
- On the data front, Australia's Consumer Confidence and Business Confidence measures improved in November and October, respectively.
- On Wednesday and Thursday, labor market data will be under scrutiny and might set the pace of the pair for the short term.
AUD/USD technical outlook: Indicators drift dangerously close to oversold levels
The technical indicators reflect the bears' dominance with the Relative Strength Index (RSI) dropping below the oversold threshold of 30 and the Moving Average Convergence Divergence (MACD) histogram printing lower red bars. These indicators are near oversold levels, which could push the pair into a correction eventually.
The bears aim to break below 0.6500, targeting the July low of 0.6430, while the bulls need to reclaim 0.6600 to ease the immediate downside pressure.
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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