The AUD/USD pair loses ground to near 0.7150 during the early Asian session on Thursday. The downbeat Australian economic data and safe-haven flows weigh on the Australian Dollar (AUD) against the US Dollar (USD). Traders will keep an eye on the preliminary reading of the US Purchasing Managers Index (PMI) for May later on Thursday.
Data released by S&P Global on Thursday showed that the preliminary reading of Australia’s S&P Global Manufacturing Purchasing Managers Index (PMI) declined to 50.3 in May from 51.3 in April. Meanwhile, the Services PMI eased to 47.7 in May, compared to 50.7 in April, while the Composite PMI fell to 47.8 in May versus 50.4 prior.
Furthermore, ongoing Middle East tensions and uncertainty surrounding US-Iran talks continue to underpin a safe-haven currency such as the Greenback and act as a headwind for the pair. US President Donald Trump said on Wednesday that talks with Iran were in the final stages, per Bloomberg. Nonetheless, Trump also reiterated a pledge to restart attacks in the coming days if Iran doesn’t agree to his terms.
Iranian President Masoud Pezeshkian stated that Tehran was not on the brink of giving in. “Forcing Iran to surrender through coercion is nothing but an illusion,” Pezeshkian posted on X.
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.
