AUD/USD edges higher after two days of losses, trading around 0.7010 during the Asian hours on Monday. The pair holds ground following the release of key economic data from China. It is worth noting that any change in the Chinese economy could affect the Australian Dollar (AUD), as China and Australia are close trading partners.
The National Bureau of Statistics (NBS) reported on Monday that China’s Retail Sales climbed 2.8% year-over-year (YoY) in February against 2.5% expected and 0.9% in December. Meanwhile, Industrial Production rose 6.3% YoY in the same period, compared to the 5.1% forecast and 5.2% seen previously.
The AUD/USD pair holds ground as the US Dollar (USD) weakens as risk aversion eases after a report from The Guardian indicated that US Energy Secretary Chris Wright expects the US-Israel conflict with Iran to end within “the next few weeks,” potentially allowing oil supplies to recover and energy prices to decline.
However, the Greenback could regain momentum as Middle East tensions intensify after US forces reportedly targeted every military site on Kharg Island over the weekend, a hub that handles nearly 90% of Iran’s oil exports. While US President Donald Trump said oil infrastructure was not struck, Iran has warned it could retaliate against any US-linked oil facilities in the region.
President Trump also called on allied nations, including the UK, France, China, and Japan, to help secure the Strait of Hormuz, with reports suggesting a potential White House announcement in the coming days. Meanwhile, European Union (EU) foreign ministers are meeting in Brussels to discuss a possible naval response to the effective closure of the Strait.
Traders’ attention now turns to US Federal Reserve policy meeting due on Wednesday. While no change to the federal funds rate is expected, investors will closely monitor policymakers’ guidance for the remainder of the year, particularly regarding inflation risks stemming from the recent surge in energy prices.
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.
