In Tuesday's session, the AUD/USD pair partially recovered after Monday's decline following the release of mid-tier US labor data. Despite strong data, the USD weakened primarily due to profit-taking, aiding the Aussie's rebound.
However, the Aussie remained below the 0.6500 level. The pair faced pressure from the widening Australian Current Account deficit and the US Dollar's resurgence due to decreasing risk sentiment prompted by concerns about China's economy and impending tariffs. Market participants now await high-impact US economic data for further guidance. On Wednesday, the US will release ISM Services PMIs and ADP Employment Change figures and on Friday, the economic calendar will feature November’s Nonfarm Payrolls.
The AUD/USD pair resumed gains, but indicators remain in negative territory with no clear signs of a reversal. The Relative Strength Index (RSI) is below 50, indicating that bears are in control. On the positive side, the Moving Average Convergence Divergence (MACD) indicator shows green bars, which suggest the presence of buying traction. However, the pair remains below its 20, 100 and 200-day Simple Moving Averages (SMA), which is a bearish sign.
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.