- AUD/USD weakens around 0.6215 in the early Asian session on Friday.
- Less expectations of Fed rate cuts and Trump policies continue to support the USD.
- RBA meeting minutes revealed the board had become more confident about inflation, but risks remained.
The AUD/USD pair remains defensive around 0.6215 during the early Asian session on Friday. The incoming Donald Trump administration is expected to boost growth and increase inflation, supporting the US Dollar (USD). Markets are likely to be quiet ahead of next week’s New Year’s holiday.
The US Federal Reserve (Fed) decided to cut interest rates by 25 basis points (bps) last week as expected, and Fed Chair Jerome Powell said further rate cuts now depend on further progress in reducing stubbornly high inflation. Additionally, analysts expect that Trump’s possible new tariff policies on trading partners could increase price pressures and slow the pace of rate cuts by the US central bank, supporting the Dollar against the Australian dollar (AUD).
Data released by the US Department of Labor (DOL) on Thursday showed that US initial jobless claims decreased to 219,000 in the week ending December 21. This reading followed the previous week’s figure of 220,000 and was below the market consensus of 224,000.
On the Australian front, the latest monetary policy minutes from the Reserve Bank of Australia (RBA) suggested that the Australian central bank is more confident that inflation is moving sustainably towards target. However, it is premature to conclude that the battle is won given a recent increase in household spending and a tight labor market. Analysts expect the RBA to begin cutting rates only in the second quarter of 2025 in a moderate easing cycle.
Australian Dollar FAQs
One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another key factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and the Balance of Trade. Market sentiment, that is, whether investors bet on riskier assets (risk-on) or seek safe havens (risk-off), is also a factor, with the risk-on being positive for the 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 RBA’s main objective 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 ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter being positive for the AUD.
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian Dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite occurs when the Chinese economy does not grow as fast as expected. Therefore, positive or negative surprises in Chinese growth data usually have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, with $118 billion a year according to 2021 data, with China being its main destination. The iron ore price, therefore, may be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD also rises as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to result in a higher likelihood of a positive trade balance for Australia, which is also positive for the AUD.
The trade balance, which is the difference between what a country earns from its exports and 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, its currency will gain value solely from the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on purchasing imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
