AUD/USD remains stronger for the third successive session, trading around 0.7120 during the Asian hours on Thursday. The pair advances toward its three-year high of 0.7147, last touched on February 12, as the Australian Dollar (AUD) strengthens following hotter-than-expected inflation data from Australia, reinforcing expectations of further interest rate hikes by the Reserve Bank of Australia (RBA) this year.
Australia’s Consumer Price Index (CPI) increased 3.8% year-over-year YoY in January, unchanged from the previous reading but above market forecasts of 3.7%. On a monthly basis, CPI rose 0.4%, moderating from 1.0% previously. Meanwhile, the RBA’s Trimmed Mean CPI climbed 0.3% MoM and 3.4% YoY in January. RBA Governor Michele Bullock said on Wednesday that the economy is in a relatively strong position, though policy decisions remain challenging and require patience in assessment.
The AUD/USD pair also gained as the US Dollar (USD) came under pressure after US President Donald Trump’s State of the Union address on Tuesday night provided no signals of easing tariff measures.
Concerns persist over the White House’s uncertain economic policies. President Trump increased the newly introduced Section 122 tariffs to 10%, despite earlier threats of raising them to 15%, following the Supreme Court’s decision to strike down a series of country-specific tariffs enacted under IEEPA 10 months earlier.
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.
