Market Data 
- AUD/USD trades flat around 0.6880 in Wednesday’s early Asian session.
- Fed’s Powell seems to favor a gradual easing path.
- China’s stimulus plans and hawkish RBA might support the Aussie in the near term.
The AUD/USD pair flatlines near 0.6880 during the early Asian session on Wednesday. Howver, the fear of wider war in the Middle East might boost the safe-haven flows and support the Greenback for the time being. Later on Wednesday, the US ADP Employment Change data is due, along with the speech from US Federal Reserve (Fed) Thomas Barkin, Raphael Bostic, Beth Hammack, Alberto Musalem, and Michelle Bowman.
Earlier this month, the Fed decided to cut the federal funds rate by half a percentage point instead of the usual quarter point. However, Fed Chair Jerome Powell indicated on Monday that the Fed was not on any preset course in respect of monetary policy. According to the CME Group’s FedWatch Tool, interest rate futures contracts have priced in a nearly 37.4% chance of a half-point cut in November, versus a 62.6% possibility of a quarter-point cut.
Meanwhile, the geopolitical risks might cap the downside for the US Dollar (USD). Bloomberg reported that Iran launched over 200 ballistic missiles at Israel on Tuesday after the US had warned just hours before that a strike was imminent. Israeli Prime Minister Benjamin Netanyahu vows to retaliate against Iran for a missile attack on Tuesday, but Tehran warned that any response would result in “vast destruction,” fuelling fears of a wider war.
On the Aussie front, China’s fresh stimulus measures might continue to underpin the China-proxy Australian Dollar (AUD) as China is the largest trading partner of Australia. Additionally, the hawkish stance from the Reserve Bank of Australia (RBA) could contribute to the AUD’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.
