Australian Dollar drifts near yearly support as holiday trade thins
- Aussie dips to 0.6215 on a quiet Friday session.
- Year-end lull keeps markets subdued.
- RBA dovish bets rise amid easing inflation and mixed economic outlook.
The Australian Dollar pair trades in a very tight range near the yearly support of 0.6200 in Friday’s session. The Aussie struggles for direction as global market activity remains muted, with traders largely focused on New Year festivities. Thin liquidity and lingering policy uncertainties contribute to the currency’s softness.
Daily digest market movers: Aussie continues soft and struggles to gain traction, USD strength
- December’s highlight was that the US Federal Reserve cut rates by 25 basis points but Chair Jerome Powell highlighted cautious further easing as inflation remains stubborn. In addition, the bank showed that it now sees less cuts than expected in 2025.
- To add to that, potential new tariffs under the incoming Trump administration could stoke higher prices, tempering the pace of Fed rate reductions into 2025.
- Market participants weigh Trump’s proposed deregulation, tax cuts, and potential tariff hikes, which could boost US growth and inflation, favoring a stronger USD.
- The Australian Dollar remains pressured as RBA minutes show officials confident in easing inflation, paving the way for potential rate cuts as soon as February.
- RBA Governor Michele Bullock reiterated a data-driven approach, underscoring no explicit discussion of a February rate cut, though odds stand at 65%.
AUD/USD technical outlook: Aussie extends losses as oversold signals build
The AUD/USD declined to 0.6215 on Friday, hovering near its yearly low. The Relative Strength Index (RSI) sits at 27, signaling deeper oversold territory with a mild downward bias. Meanwhile, the Moving Average Convergence Divergence (MACD) histogram prints flat red bars, indicating persistent selling pressure. Despite the pair’s extended losses, thin holiday trading volumes could limit any pronounced move, leaving the Aussie vulnerable to further downside without a clear catalyst.
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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