- AUD/USD edges lower to near 0.6790 in Wednesday’s early Asian session.
- Escalating geopolitical tensions might weigh on the pair, while the Fed rate cut bets might cap its downside.
- Investors will monitor the Australian monthly CPI report, which is due on Wednesday.
The AUD/USD pair trades with mild losses around 0.6790 on Wednesday during the early Asian session. The risk-off mood amid escalating geopolitical tensions in the Middle East weighs on riskier assets like the Australian Dollar (AUD). Investors will take more cues from the Australian monthly Consumer Price Index (CPI) on Wednesday for fresh impetus.
The rising Middle East geopolitical risks might boost the safe-haven flows, benefiting the Greenback for the time being. Thousands of troops from special units mobilized for a large-scale operation in the northern West Bank, which is anticipated to take several weeks, per the local news agency Aljazeera.
However, the US Federal Reserve’s (Fed) rate cut expectations are likely to cap the upside of the US Dollar (USD) and provide some support to AUD/USD. The US Fed is anticipated to cut rates in September, with a quarter-point move expected after Fed Chair Jerome Powell said on Friday that it was time to cut rates.
Consumer confidence in the United States continued to improve in August, with the Conference Board’s (CB) Consumer Confidence Index climbing to 103.3 in August from 101.9 (revised from 100.3) in July. Nonetheless, this data provides little to no impact on the US D’s valuation.
On the Aussie front, the monthly Australian CPI inflation is estimated to ease to 3.4% YoY in July from 3.8% in June. The softer-than-expected outcome could trigger market speculation that the Reserve Bank of Australia (RBA) will lower interest rates this year.
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.
