Australian Dollar stabilizes amid looming US tariffs threats
- Pair inches up after dipping to the 0.6220 zone on Tuesday.
- Trump’s hinted tariffs on China weigh on risk assets, tempering AUD gains.
- RBA is likely to cut rates in February, keeping the Aussie on the defensive.
The Australian Dollar (AUD) mildly rose to 0.6270 on Tuesday, recovering after briefly falling near 0.6220 when United States (US) President Donald Trump reiterated plans to impose tariffs on China. Although the Reserve Bank of Australia (RBA) is widely expected to initiate a rate cut in February, the currency found modest footing in a calmer market atmosphere. Investors, however, remain cautious as the US Dollar (USD) climbs on revived tariff concerns.
Daily digest market movers: Aussie recovers mainly as markets await US tariffs directions
- In the wake of President Trump’s inauguration, the administration directed agencies to probe ongoing trade imbalances and currency manipulation, especially targeting China, Canada and Mexico.
- Despite uncertainties over Trump’s early trade agenda, a softer US Dollar provided a lift to stock markets in Europe and the US, as well as risk-driven currencies such as the Aussie.
- The CME FedWatch tool suggests a 55.6% chance the Federal Reserve (Fed) will hold rates steady at its May gathering, with rising chatter about a potential rate decrease by June.
- US 10-year yields hover around 4.60%, while US bond markets are calm following Martin Luther King Jr. Day. Traders brace for possible updates on tariffs policies in the days ahead.
- On the local front, markets are gearing up for a cut by the Reserve Bank of Australia as early as next month which might prevent any upside.
AUD/USD technical outlook: Indicators hint at choppy momentum amid bullish undercurrents
The AUD/USD pair’s price action remains volatile, briefly sliding toward 0.6220 before rebounding to 0.6275. The Relative Strength Index (RSI) currently sits around 52—still in positive territory but sharp, indicating a potential waning of bullish momentum. Meanwhile, the Moving Average Convergence Divergence (MACD) histogram exhibits rising green bars, supporting a constructive near-term view.
Although the Aussie’s short-lived dip underscores lingering downside risks, a sustained break above recent highs near 0.6300 could reinforce the pair’s recovery if trade policy anxieties recede.
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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