AUD/USD halts its five-day losing streak, trading around 0.6860 during the Asian hours on Tuesday. The pair advances as the Australian Dollar (AUD) receives support after the Reserve Bank of Australia released its March Meeting Minutes.
The RBA Minutes showed that board members agreed further tightening would likely be needed, but differed on the timing. Oil near $100 per barrel is seen capable of lifting June-quarter CPI to around 5%, with the majority concerned that inflation expectations could become unanchored without prompt action.
Australia’s Private Sector Credit rose by 0.6% month-over-month (MoM) in February, slightly improving from a ten-month low increase of 0.5% in the previous month and in line with market expectations. On an annual basis, private sector credit edged up to 7.8% from 7.7% in January.
The AUD/USD pair also appreciates due to a softer US Dollar (USD) after five consecutive days of gains. However, the Greenback may regain traction amid rising safe-haven demand linked to escalating Middle East tensions, which also raise concerns about potential impacts on inflation and economic growth.
However, Federal Reserve (Fed) Chair Jerome Powell noted on Monday that long-term US inflation expectations remain well anchored despite heightened Middle East uncertainties and emphasized that the Federal Reserve policy stance allows officials to evaluate the economic impact of the Iran conflict.
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.
