- AUD/USD softens to near 0.6145 in Monday’s early Asian session.
- The US Nonfarm Payrolls grew by 256K in December; Unemployment Rate fell to 4.1%.
- The concerns about China’s economic downturn weigh on the Aussie.
The AUD/USD pair remains on the defensive around 0.6145 during the early Asian session on Monday. The US job growth came in stronger than expected in December, supporting the US Dollar (USD) broadly.
Data released by the US Bureau of Labor Statistics (BLS) on Friday showed that the Nonfarm Payrolls (NFP) rose by 256K in December, compared to a 212K increase (revised from 227K) seen in November. This reading surpassed the market expectation of 160K by a wide margin.
Meanwhile, the Unemployment Rate ticked lower to 4.1% in December from 4.2% in November. Finally, annual wage inflation, as measured by the change in the Average Hourly Earnings, dropped to 3.9% in December from 4% in the previous reading.
The upbeat US labor market data for December is likely to convince the US Federal Reserve (Fed) to keep interest rates unchanged this month, which underpins the Greenback against the Australian Dollar (AUD). According to the CME FedWatch tool, financial markets expect the US central bank to keep its benchmark overnight interest rate unchanged in the 4.25%-4.50% range at its January 28-29 meeting. “It would take a very bad set of jobs reports to get the Fed easing again by March, and, so, we now see the next cut in June followed by a final one in September,” said Michael Feroli, chief U.S. economist at JPMorgan.
On the other hand, the Aussie remains under selling pressure against the USD, lowest level since April 2020. The slower growth and deflationary risks in China continue to undermine the China-proxy AUD. The Citi economists said that the final quarter of last year was expected to be the seventh in a row in which China’s GDP deflator was negative.
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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