AUD/USD bounces up to test resistance at 0.6455 as market sentiment improves
The Aussie bounces up on a brighter market mood and hopes of further stimulus in China.
Chinese authorities have promised more proactive fiscal measures and loser monetary policies to boost economic recovery.
The RBA is expected to leave interest rates unchanged at restrictive levels on Tuesday.
The Australian Dollar performed a significant comeback on Monday’s European session. An improved market sentiment and some comments by China’s President Xi Jinping have provided a fresh boost to the Aussie.
China’s leaders vowed more proactive fiscal policies and looser
monetary policies next year to accelerate domestic consumption at a key policy meeting ahead of this week’s Central Economic Work conference.
Speculation about further stimulus measures has offset the impact of weak Chinese CPI data. Consumer inflation contracted by 0.6% in November, beyond the 0.4% expected after a 0.3% decline in October. These figures add to evidence of the weak post-Covid recovery in the world’s second-largest economy.
In Australia, the focus this week is on the RBA’s monetary policy decision, due on Tuesday. The bank is widely expected to leave rates at the 4.35% current level with the market’s focus on the timing for the Bank’s easing cycle. Her comments on this question are likely to set the Aussie’s near-term direction.
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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