- AUD/USD recovers sharply to near 0.6280 as investors digest US Trump’s tariff threats quickly.
- Hot China’s CPI report has also boosted demand for the Australian Dollar.
- This week, investors will focus on the US CPI and the Fed Powell’s testimony before Congress.
The AUD/USD bounces back strongly to near 0.6280 and turns positive after a weak opening near 0.6235 in Monday’s European session. The Aussie pair attracts significant bids as investors shrug off fears associated with United States (US) President Donald Trump’s tariff threats.
Over the weekend, President Trump threatened to raise 25% tariffs on imports of steel and aluminum from all nations and reciprocal tariffs on nations where he sees unfair trade practices. The impact of Trump’s international agenda was visible on the market sentiment as investors rushed to the safe-haven fleet. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, had a strong opening to near 108.50 but later on, gives up the majority of intraday gains and drops to near 108.20.
Market participants have started anticipating that Trump’s tariff threats are more a negotiation tool to gain an upper hand for closing better deals.
Another reason behind strength in the Australian Dollar (AUD) is faster-than-expected acceleration in the China Consumer Price Index (CPI) data for January. Year-on-year CPI rose by 0.5%, faster than expectations of 0.4% and the former reading of 0.1%. On month, the CPI grew by 0.7% after remaining flat in December but was slower than estimates of 0.8%.
The Australian Dollar (AUD) is a liquid proxy to Chinese Yuan (CNY), being Australia a major trading partner of China.
This week, the major trigger for the US Dollar (USD) will be the Federal Reserve (Fed) Chair Jerome Powell’s testimony before Congress on Tuesday-Wednesday and the US CPI data on Wednesday.
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.
