AUD/USD edges higher above 0.6350 ahead of PBoC rate decision
- AUD/USD gains traction to near 0.6380 in Monday’s early Asian session.
- Trump exempted key technology products from his new reciprocal tariffs, boosting the Aussie.
- Traders brace for the PBoC interest rate decision later on Monday, with no change in rate expected.
The AUD/USD pair trades in positive territory around 0.6380 during the Asian session on Monday, bolstered by the weaker US Dollar (USD). Traders await the developments surrounding the United States and China trade discussions, while tensions between the two largest economies are intensifying.
The Australian Dollar (AUD) edges higher against the Greenback after US President Donald Trump announced exemptions for key technology products from the newly proposed “reciprocal” tariffs. These exemptions, which include smartphones, laptops, semiconductors, solar cells, and flat-panel displays, mostly benefit products manufactured in China, Australia's biggest trade partner and a major buyer of its commodity exports.
On the other hand, uncertainty lingers around the timing of the Reserve Bank of Australia's (RBA) next rate cut, as trade tariff risks dampen the economic outlook. Markets are currently pricing in a 25 basis points (bps) cut in May and around 120 bps of total easing over the year. The dovish bets of the RBA could drag the Aussie lower against the USD in the near term.
Later on Monday, the People's Bank of China (PBOC) is widely expected to leave its benchmark lending rates unchanged at the monthly fixing, a Reuters survey showed, but markets are wagering on more stimulus being rolled out soon in the face of an escalating US-China trade war.
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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