AUD/USD tumbles to near 0.6180 as US Dollar gains ground ahead of Trump’s inauguration
- AUD/USD dives to near 0.6180 as the USD strengthens, with investors focusing on Trump’s inauguration.
- Market experts believe that Trump’s policies will be pro-growth and inflationary for the US.
- The Chinese economy grew at a robust pace of 5.4% in the last quarter of 2024.
The AUD/USD pair falls sharply to near 0.6180 in Friday’s North American session. The Aussie pair slumps as the US Dollar (USD) gains ground after a three-day losing streak. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to near 109.20.
The Greenback gains as the market sentiment is cautious ahead of President-elect Donald Trump’s inauguration ceremony on Monday. Market participants expect Trump will release updated tariff plan sooner after joining the White House, a scenario that would lead to a global trade war. The impact will be favorable for growth and inflationary pressures in the United States (US), which would force the Federal Reserve (Fed) to keep interest rates at their current levels for a longer period.
Earlier, the US Dollar faced selling pressure after the release of the US Consumer Price Index (CPI) data for December, which showed that the core inflation decelerated to 3.2%, against estimates and the prior release of 3.3%. This led to a slight acceleration in Fed dovish bets.
According to the CME FedWatch tool, traders are pricing in more than one 25-bps interest rate reduction this year, seeing the first coming in the June meeting.
Meanwhile, the Australian Dollar (AUD) weakens despite China’s Q4 Gross Domestic Product (GDP) data came in stronger than expected. Compared to same quarter of the previous year, the Chinese economy expanded by 5.4%, faster than estimates of 5% and the reading of 4.6% recorded in the previous quarter.
Historically, the Australian Dollar gets benefitted by China’s upbeat economic data, being a close trading partner to China.
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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