Australian Dollar extends gains on improved sentiment
- Aussie climbs 0.42% against the USD to 0.6225 on Wednesday.
- China trade data, Yuan stabilization bolster risk appetite.
- US Dollar slips after softer inflation signals lead investors to dump the Greenback.
The Australian Dollar receives support from improved market sentiment and strong commodity prices. The AUD gained ground on robust trade data from China and Beijing’s moves to stabilize the Yuan. Meanwhile, the US Dollar depreciated in the wake of underwhelming Consumer Price Index (CPI) inflation figures reported on Wednesday.
Daily digest market movers: Aussie continues weak run after stellar US jobs report
- The US Dollar Index oscillated between gains and losses on Wednesday, dipping below 109.00 after the CPI release, then bouncing to 109.30 near the session’s end.
- The Australian Dollar extended its rebound above 0.6200, eyeing a possible test of the 0.6300 region in the short term.
- The annual CPI came in at 2.9%, up from 2.7%, while core inflation rose 0.2% MoM and 3.2% YoY, slightly below expectations.
- US Treasury yields sank post-CPI, with the 10-year benchmark dropping to 4.65% after hitting a 14-month high of 4.80%.
- On the negative side for the Aussie, the Reserve Bank of Australia considers a potential rate cut in February, citing tepid domestic growth and subdued inflation risks.
AUD/USD technical outlook: Bulls reclaim 20-day SMA as momentum improves
The AUD/USD rose to 0.6225 on Wednesday, extending its recovery from multi-year lows. The Relative Strength Index (RSI) stands at 49, climbing sharply from negative territory, while the Moving Average Convergence Divergence (MACD) histogram prints flat red bars, hinting that bearish pressure is waning.
Notably, the pair managed to jump above its 20-day Simple Moving Average (SMA), a development that could encourage additional upside if follow-through buying emerges. Nonetheless, the Aussie remains vulnerable to lingering RBA dovishness and a still-resilient US Dollar underpinned by robust economic data.
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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