AUD/USD jumps to near 0.6330 as concerns over US economic growth deepen
- AUD/USD climbs to near 0.6330 amid deepening concerns over the US economic outlook.
- Investors see US economic shocks in near term amid Trump’s tariff agenda.
- Soft China inflation data to dampen the Aussie Dollar’s outlook.
The AUD/USD pair rises sharply to near 0.6330 in North American trading hours on Monday. The Aussie pair attracts significant bids as the US Dollar (USD) trades cautiously, with investors turning cautious over the United States (US) economic outlook. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades around 103.50, the lowest level seen in four months.
The S&P500 is down almost 1.5% in the North American session, indicating a significant decline in investors’ risk appetite.
Market participants have become increasingly concerned over US growth prospects after commentary from US President Donald Trump on Friday that there is a “period of transition”, because what we are doing is very “big” in an interview with Fox News. Investors have taken Trump’s comments as a signal to an economic turbulence in the near term.
Additionally, weakness in a slew of economic data released lately has also flagged uncertainty over the US economic path. The US Consumer Confidence slumped to 15-month low, the ISM Manufacturing New Orders Index declined and the Unemployment Rate accelerated in February.
Meanwhile, the Australian Dollar (AUD) trades higher despite faster-than-expected slowdown in the China’s Consumer Price Index (CPI) data for February. Month-on-month CPI deflated by 0.2% after growing by 0.7% in January. Economists expected the inflation data to have deflated by 0.1%. On year, the CPI declined by 0.7% against estimates of 0.5% deflation. Persistently lower inflationary pressures indicate significant weakness in the Chinese economy. Such a scenario is unfavorable for the Aussie Dollar, knowing that Australia relies heavily on exports to China.
This week, the Australian economic calendar will be light. Therefore, investors will pay close attention to the US data to project the next move in the Aussie pair. Investors will focus closely on the US CPI data for February, which will be released on Wednesday.
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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