- AUD/USD trades in positive territory near 0.6400 in Monday’s early Asian session.
- US Nonfarm Payrolls was stronger than expected in November, rising by 227,000 vs. 36,000 prior.
- The RBA is expected to hold the interest rate steady at 4.35% at its meeting on Tuesday.
The AUD/USD pair gains ground to around 0.6400 on the weaker US Dollar (USD) during the Asian session on Monday. There are no Federal Reserve (Fed) speakers this week due to the media blackout. All eyes will be on the Reserve Bank of Australia (RBA) interest rate decision on Tuesday, with no change in rates expected.
Data released by the US Bureau of Labor Statistics (BLS) on Friday showed that the US Nonfarm Payrolls (NFP) increased by 227,000 in November, compared with an upwardly revised 36,000 in October. This reading came in better than the estimation of 200,000. Meanwhile, the Unemployment Rate ticked up to 4.2% in November from the previous reading of 4.1%.
Several Fed officials have spoken over the past few weeks, and there is near unanimity that the labor market is cooling but healthy. The Greenback edged lower with the immediate reaction to Nonfarm Payrolls data. Financial markets are now pricing in nearly 70% odds of a 25 basis points (bps) rate cut by the Federal Reserve (Fed) at the upcoming meeting on December 17-18, according to the CME FedWatch tool.
On the Aussie front, the Australian central bank is anticipated to keep the benchmark interest rate steady at 4.35%. RBA Governor Bullock said earlier this month that “underlying inflation is still too high to be considering lowering the cash rate target in the near term.” However, Australia’s Q3 GDP growth report was weak and suggests a dovish surprise cannot be ruled out.
The market has brought forward the timing of the first rate cut to April versus May before. Market players will keep an eye on the RBA Press Conference. The dovish comments from the policymakers could exert some selling pressure on the Aussie against the USD.
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.
