The Australian Dollar (AUD) hit a 10-month low on Wednesday. However, the AUD/USD pair attempts to recover from the recent losses despite disappointing Australia's Retail Sales data.
Australia's monthly Consumer Price Index (CPI) has rebounded from July's reading, which could be attributed to the increasing energy prices. This expected increase in inflation has raised anticipations of another interest rate hike by the Reserve Bank of Australia (RBA). However, the AUD failed to gain traction of positive Consumer Price Index (CPI) figures.
The Aussie Dollar is under downward pressure due to increased risk aversion sentiment in the market. The drop-in commodity prices are also acting as a limiting factor on the upside potential of the AUD/USD pair.
The US Dollar Index (DXY) continues to strengthen, propelled by robust macroeconomic data from the United States (US), trading at its highest levels since December. This surge in the US Dollar (USD) is attributed to the positive performance of US Treasury yields over an impending US government shutdown. The yield on the 10-year US Treasury note has reached record highs.
The bullish momentum in the USD is further reinforced by the hawkish remarks made by Federal Reserve (Fed) board members. Neel Kashkari, the President of the Minneapolis Federal Reserve, recently made comments that suggest the potential for additional rate hikes in the future.
Kashkari also left open the possibility of interest rates remaining at their current levels if rate cuts are delayed even further.
Australian Dollar trades higher around 0.6360 psychological level during the Asian session on Thursday. AUD/USD pair could find a barrier around 0.6400 psychological level, followed by the 21-day Exponential Moving Average (EMA) at 0.6422. A firm break above the latter could support the Aussie Dollar (AUD) to explore the region around 26.6% Fibonacci retracement at 0.6464. On the downside, the monthly low at 0.6357 aligned with the 0.6350 psychological level could be the key support, following the 0.6300 psychological level.
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.
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