Market Data 
- AUD/USD trades weaker near 0.6790 in Monday’s early Asian session.
- Fed’s Powell said ‘time has come’ for interest rate cuts.
- The RBA’s hawkish comments might cap the AUD’s downside in the near term.
The AUD/USD pair trades on a weaker note around 0.6790 during the early Asian session on Monday. However, the US Dollar (USD) is likely to remain under pressure after US Federal Reserve Chairman Jerome Powell’s dovish Jackson Hole speech. The US Durable Goods Orders for July are due later on Monday.
Fed Chair Powell spoke at the Kansas City Fed’s annual economic symposium in Jackson Hole on Friday, saying, “The time has come for policy to adjust.” Powell did not mention when rate cuts would start or how large they might be, but the markets expect the Fed to announce a quarter-point rate cut in the September meeting. The FOMC Minutes from the July meeting last week showed a “vast majority” of Fed officials believe a September cut will be appropriate so long as there are no data surprises.
Following Powell’s speech, Philadelphia Fed President Patrick Harker said that the US central bank needs to lower rates methodically. Meanwhile, Chicago Fed President Austan Goolsbee said that monetary policy is currently at its most restrictive level, and the Fed’s focus is now shifting towards achieving its employment mandate. The expectation of the Fed rate cut is likely to exert some selling pressure on the USD and create a tailwind for AUD/USD.
On the Aussie front, the Reserve Bank of Australia (RBA) Minutes revealed that the board members agreed that a rate cut is unlikely soon. RBA Governor Michele Bullock noted that the central bank will not hesitate to raise rates again to combat inflation if needed. The hawkish remarks from the RBA might further boost the AUD against the Greenback.
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.
