Australian Dollar extends losses amidst concerns around Australian and Chinese economy
- AUD/USD saw a larger decline on Thursday, to land at 0.6550, reverting to the status of being the worst-performing G10 currency.
- Persistent concerns about the Chinese economy's health and the AUD's 'high risk' status continue to add pressure on the AUD.
- A weakening Australian economic outlook might make the RBA reconsider its hawkish stance.
In Thursday's session, the Australian Dollar (AUD) intensified losses against the USD, with AUD/USD falling close to 0.6550 due to multiple headwinds. Continual weakness in China's economy paired with depreciating iron ore prices are major contributors to the AUD's decline.
Despite the Australian economy's sparks of vulnerability, the Reserve Bank of Australia (RBA) remains resistant to rate cuts due to stubbornly high inflation. This stance could potentially hinder further depreciation of the AUD. The RBA is slated to be one of the last central banks among the G10 to implement rate cuts, which may eventually limit the AUD losses.
Daily digest market movers: Aussie’s decline extends, amidst alarming economic indicators in China and Australia
- In a 'risk-off' sentiment, the AUD registered an intense sell-off, primarily influenced by market worries over the Chinese economy and the Aussie's conspicuous position as the 'high risk' G10 currency.
- At the start of the week, the People’s Bank of China (PBoC) decided to cut rates, which sparked fears about the health of the second-largest economy in the world, which happens to be Australia’s biggest trading partner.
- In addition, Industrial metals prices were under pressure due to fears of soft Chinese demand.
- The Reserve Bank of Australia (RBA) remains hawkish and doesn’t show signs of easing on its stance and markets bet on a hike in Q4.
AUD/USD technical analysis: Bearish outlook is strengthened with the pair now below mains SMAs
The AUD/USD moving below 20, 100, and 200-day Simple Moving Average (SMA) represents a more severe area of concern, suggesting that the downward trends may go further.
The AUD/USD is undergoing a significant nine-day losing streak, losing almost 3.50% in July and indicators are drastically negative, but their oversold nature with the Relative Strength Index (RSI) near 30 might prompt a corrective response.
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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