Market Data 
- AUD/USD gains ground to near 0.6420 in Monday’s early Asian session.
- China’s CPI fell for the third month amid ongoing economic struggles.
- The US and China cite progress in Geneva trade talks.
The AUD/USD pair edges higher to around 0.6420 during the early Asian session on Monday. Optimism in US-China trade negotiations in Geneva, Switzerland, boosts the Australian Dollar (USD) against the Greenback.
China’s Consumer Price Index (CPI) fell for the third month in April as the country grapples with sluggish spending amid a fierce trade war with the US. Data released by the National Bureau of Statistics of China on Saturday showed that the CPI dropped by 0.1% YoY in April after declining 0.1% in March. The market consensus was for a 0.1% decrease in the reported period. Meanwhile, Producer Price Index (PPI) fell 2.7% YoY in April, compared to a 2.5% fall in March. The figure came in lower than the market consensus of -2.6%.
The US and China reported “substantial progress” after two days of talks in Switzerland aimed at de-escalating a trade war. China’s Vice Premier He Lifeng described trade talks with US officials as “an important first step” in stabilising bilateral trade relations, while US Treasury Secretary Scott Bessent said the two sides made “substantial progress.
However, traders will keep an eye on the US-China trade talks in detail. The US would share details on Monday, and the positive developments could provide some support to the China-proxy Aussie, as China is a major trading partner of Australia.
Additionally, Chinese officials have eased key monetary policy tools in an attempt to boost domestic economic activity. These include an interest rate cut and a lowering of bank reserve requirements, both of which are intended to stimulate more lending. This, in turn, contributes to the Australian Dollar’s upside.
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.
