- AUD/USD consolidates around 0.6200 amid thin trading volume following the Christmas and Boxing Day holidays.
- The RBA becomes confident over inflation easing in line with their expectations.
- The Fed turns cautious in interest rate cuts as progress in inflation towards the central bank’s target of 2% has stalled.
The AUD/USD pair trades in a very tight range near the yearly support of 0.6200 in Friday’s North American session. The Aussie pair struggles for direction as the price action is broadly muted in global markets amid thin trading volume, given that traders are busy welcoming the New Year.
The Australian Dollar (AUD) is currently exposed to a fresh downside move below 0.6200 against the US Dollar (USD) as the Reserve Bank of Australia (RBA) minutes for December’s policy meeting showed that policymakers have become confident that price pressures are easing in line with their expectations, which makes “appropriate for them” to begin relaxing the “degree of monetary policy tightness”.
This has led to an increase in RBA dovish bets. Traders expect the RBA to start reducing its key borrowing rates from the policy meeting in February.
Meanwhile, the US Dollar (USD) drops slightly, with the US Dollar Index (DXY) struggling to hold the key support of 108.00. The Greenback ticks lower while its outlook remains firm as the Federal Reserve (Fed) is expected to deliver fewer interest rate cuts in 2025.
The Fed has shifted its stance from “dovish” to “cautionary” on interest rates as progress in the disinflation trend has stalled in last three months and labor market conditions are not as bad as they appeared in the September meeting. Additionally, policymakers see incoming immigration, tariff and tax policies from the US President-elect Donald Trump as inflationary for the economy.
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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