- The Australian Dollar is struggling to recover from recent losses.
- The RBA’s decision to keep policy rates unchanged could put pressure on the Australian dollar.
- Rising US Treasury yields bolster the Dollar, along with encouraging US employment data.
On Wednesday, the Australian dollar (AUD) stops a two-day streak of losses. However, the AUD/USD pair is under pressure due to risk-off sentiment and the strengthening of the US Dollar (USD). Furthermore, the pair weakened after the interest rate decision by the Reserve Bank of Australia (RBA) on Tuesday.
Australia’s central bank opted to maintain the status quo, leaving the current interest rate unchanged at 4.10% at the recent monetary policy meeting. This decision could put pressure on the pair. However, there is the possibility of a rate hike, and expectations point to a maximum of 4.35% by the end of the year. This projection is consistent with the persistent rise in inflation above the target.
The US Dollar Index DXY hit its highest level in 11 months on the back of good employment data and rising Treasury yields. JOLTS job openings exceeded expectations, causing US yields to rise. The 10-year US Treasury yield hit its highest level since 2007.
Additionally, market caution regarding the US Federal Reserve’s interest rate path is contributing to the positive sentiment surrounding the Dollar.
Daily Market Drivers Summary: Australian Dollar Weakens on US Dollar Strength and Market Caution
- The RBA opted to maintain the Official Cash Rate (OCR Rate) at 4.10%, in line with widespread expectations, which could put pressure on the Australian Dollar.
- Michele Bullock, the newly appointed governor of the RBA, stressed in her inaugural monetary policy statement that further tightening of monetary policy may be necessary.
- Bullock mentioned that recent data is consistent with inflation returning to the target range. Although inflation in Australia has peaked, it remains high and is expected to persist for some time.
- The 10-year US Treasury yield hit 4.85% on Wednesday, the highest level since 2007.
- The JOLTS index of US job openings improved to 9.61 million in August, up from 8.92 million in the previous reading. The market expected a decrease to 8.80 million.
- Cleveland Federal Reserve President Loretta Mester said Tuesday that she is likely to support an interest rate hike at the next meeting if the current economic situation holds.
- Atlanta Fed President Raphael Bostic shared his view on the outlook for the Fed’s monetary policy: “I’m not in a hurry to raise rates, nor to lower them,” and insisted on a patient approach, indicating that at the moment there is no urgency to adopt new measures.
- Traders await US employment data, with the release of the ADP and ISM reports on Wednesday and non-farm payrolls on Friday. Australia’s trade balance will also be published on Thursday.
Technical Analysis: Australian Dollar around 0.6300, November low appears as support
The Australian Dollar is trading around 0.6310 on Wednesday. The main level at 0.6300 is emerging as immediate support, followed by the November low at 0.6272. To the upside, the 21-day EMA at 0.6402 appears to be a key barrier, following the 23.6% Fibonacci retracement at the 0.6464 level.
AUD/USD daily chart
Australian Dollar FAQ
What factors determine the price of the Australian dollar?
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.
How do decisions by the Reserve Bank of Australia affect the Australian dollar?
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.
How does the health of the Chinese economy influence the Australian dollar?
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.
How does the price of iron ore influence 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.
How does the trade balance influence the Australian dollar?
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.
